The Drinking Water State

Revolving Fund Program

FINANCING AMERICA’S DRINKING WATER

FROM THE SOURCE TO THE TAP

- REPORT TO CONGRESS
Office of Water (4606M)

EPA-918-R-03-009

www.epa.gov/safewater

May 2003

Living in this great nation of ours, it is easy to take many routines of our daily life for granted. One of these is our

daily action to turn on the tap for a glass of water to drink. We are fortunate that, throughout this country, local

communities and private businesses operate public water systems that provide us safe and clean drinking water.

Ensuring that our drinking water is safe from the source - be it a mountain lake or an aquifer - to the tap relies on

the concerted efforts of thousands of public water system owners, operators and managers and staff of state

drinking water programs.

Just as we rely on water from our taps, that water relies on infrastructure to carry it from its source to the plant where

it is treated to remove contaminants and from the plant to the customers. Billions of dollars have been invested in our

nation’s water infrastructure and we must remain ever vigilant to ensure that it does not fall into disrepair that would

result in contamination of our drinking water. In 2001, the Environmental Protection Agency released a survey of

drinking water infrastructure needs which found that public water systems must invest $151 billion in infrastructure

improvements over the next twenty years to continue to provide safe drinking water to consumers. These needs are

great, and can represent a particular burden for our nation’s small water systems, which have a small customer

base against which to distribute costs.

The 1996 Safe Drinking Water Act Amendments authorized the Drinking Water State Revolving Fund (DWSRF)

grant program to help systems, especially those with great economic need, finance infrastructure improvements

needed to protect public health and ensure compliance with drinking water standards. The programs are managed by

states, who best know the needs of the systems under their jurisdiction. States have used DWSRF funds to help water

systems make needed infrastructure improvements, develop programs to improve the management of water

systems, and establish and expand programs that protect sources of drinking water.

The DWSRF has proven to be a success - communities across the country have benefitted from DWSRF assistance

and states have strengthened their drinking water programs. As we look to the future and the challenges of aging

infrastructure, increasing population, and threats to our water resources, the DWSRF should serve as a critical program in ensuring public health protection and will help each of us maintain confidence as we turn on the tap

every day.

Christine Todd Whitman

Printed on Recycled Paper

Message from the Administrator
The Drinking Water State Revolving Fund Program

Financing America’s Drinking Water From the Source to the Tap

Report to Congress

United States

Environmental Protection Agency

Office of Water

(4606M)

EPA 918-R-03-009

May 2003

Printed on Recycled Paper
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Executive Summary

i

Executive Summary

In the 1996 Amendments to the Safe Drinking Water Act (SDWA), Congress authorized the Drinking

Water State Revolving Fund (DWSRF) program — a new funding program to help public water systems

make infrastructure upgrades necessary to ensure the continued provision of safe drinking water and help

states undertake activities to support their drinking water programs. Under the DWSRF program, EPA

awards capitalization grants to states, which in turn provide low-cost loans and other types of assistance

to public water systems to finance the costs of infrastructure projects needed to achieve or maintain

compliance with SDWA requirements. States are also authorized to set aside a portion of their

capitalization grants to fund a range of activities including source water protection, capacity

development, and operator certification.

This Report to Congress describes the progress that states have made in the DWSRF program since the

first grant was awarded in March 1997. The report uses information provided to EPA by states through

state fiscal year (SFY) 2001 (June 30, 2001). In its first five years, the DWSRF program has proven to

be an important tool in helping states and public water systems address infrastructure needs and public

health protection.

▼ Infrastructure Funding

Using funds made available through federal grants, state match, net bond proceeds, transfers from the

Clean Water State Revolving Fund program (CWSRF), earnings and repayments, states provided public

water systems with close to 1,800 loans totalling $3.8 billion. This represented 72 percent of the

available funds—$1.4 billion remained available for loans. Loans in the program must have interest rates

that are less than market rate and repayment terms of no more than 20 years. Weighted average interest

rates for loans in the program have generally ranged between 2 and 4 percent. When compared to the

20 year Bond Buyer Index interest rate (a proxy for market rate), which ranged between 5.1 and 5.8

percent for the same period, it is apparent that loan recipients in the program benefited from a

considerable subsidy.

Congress acknowledged that even the low interest rates made available through the program may not

make these loans affordable for some systems. Therefore, the SDWA allows states to provide additional

subsidies (e.g., principal forgiveness, negative interest rate loans) to systems identified as serving

disadvantaged communities. States may also extend loan terms to up to 30 years for these systems.

States determine which systems are disadvantaged in accordance with state-developed affordability

criteria. Twenty-nine states have provided assistance to systems through a disadvantaged assistance

program. Sixteen states offered principal forgiveness, 18 offered extended loan terms, and 10 offered

both types of assistance.
DWSRF Report to Congress

ii

The SDWA also placed a

special emphasis on providing

assistance to small systems

serving 10,000 people or

fewer, requiring that states

provide a minimum of 15

percent of their available

funding to small systems.

States have far exceeded the

requirement, with 41 percent

of loan funds going to small

systems. The actual

percentage of loan agreements

provided to small systems (75

percent) is considerably larger,

which reflects the fact that the

average dollar amount of loans

to small systems is less than

that for larger systems.

When looking at how funds

have been directed in the

DWSRF program, treatment

represented the largest

percentage of project costs

(43%), followed by projects to

address transmission and

distribution needs (32%).

The law requires that states

give priority to projects that are needed to protect public health and ensure compliance with the SDWA.

While solutions to public health and compliance problems may require a system to address any of the

four categories of infrastructure (transmission and distribution, treatment, source and storage), many

projects require costly treatment solutions.

▼ Set-Asides

The 1996 Amendments also included several other new programs and requirements aimed at

strengthening the technical, financial, and managerial capacity of public water systems and preventing

contamination of sources of drinking water. The law allowed states to use up to 31 percent of their

grants to support these types of activities. States must describe how funds are used in workplans, most of

which range from one to three years.

Nationally, states have reserved approximately 16 percent of federal grants for these purposes, although

on an individual state basis the amount reserved has ranged from 7 to 31 percent. Through SFY 2001,

states had expended 43 percent of the $576 million in funds they reserved to conduct set-aside activities.

Fund

Total Funds Appropriated* $4.4 billion

Total Funds Available to States $4.2 billion

Total Grants Awarded to States $3.6 billion

State Contributions $773 million

Net Leveraged Bond Proceeds (15 states) $1 billion

Total Amount Transferred from CWSRF (8 states) $147 million

Total Funds Available $5.2 billion

Total Loans Executed (#, $) 1,776, $3.8 billion

Loans to Small Systems (#, $) 1,338, $1.5 billion

Percent projects that have started construction 89%

Percent projects completed 46%

Set-Asides Reserved (% of grant awards) Expended

Set Asides Reserved $576 million (15.8%) $244 million

Administration and Technical Assistance $135 million (3.7%) $75 million

Small System Technical Assistance $54 million (1.5%) $24 million

State Program Management $147 million (4.0%) $68 million

Local Assistance and Other State Programs $240 million (6.6%) $77 million

DWSRF Program at a Glance (through June 30, 2001)

*Appropriations through FFY 2002 are $5.3 billion
Executive Summary

iii

EPA had concerns about slow progress in expenditures of set-asides, but expenditures have increased from

9 to 42 percent from SFY 1998 through 2001.

States have funded a wide range of activities through the set-asides that fall under several broad

categories, such as:

• Enhancing the technical, financial, and managerial capacity of public water systems in an effort to

make systems more sustainable and to promote long-term compliance with the law.

• Enhancing operator certification programs to ensure that operators of public water systems are

properly trained in the operation of facilities and meeting requirements under the law.

• Providing technical assistance to small systems, which often have limited financial resources and face a

great challenge in meeting new SDWA requirements.

• Facilitating partnerships with institutions of higher learning, water system professional and trade

organizations, government officials, and the general public to carry the message of the importance of

drinking water safety.

• Enhancing support for state drinking water programs to implement new programs and build existing

programs in the areas of regulatory oversight, data systems, and source water protection.

• Promoting source water protection to manage potential sources of contamination and prevent

pollution from reaching sources of drinking water.

▼ Financial and Programmatic Effectiveness

The report includes a discussion of several factors considered in an effort to gauge the progress and

effectiveness of the program. In the last few years, states have worked hard to develop and implement

successful programs. States have received 87 percent of the federal grants available to them and initiated

construction on projects for 89 percent of the executed loan agreements. When considering the return

on federal investment in the program, the numbers are impressive. States have used several sources to

add funds to the program, exceeding the amount of federal dollars provided. After removing federal

disbursements for set-asides, the national disbursements as a percent of net federal outlays for

infrastructure projects is 160 percent. In other words, for every $1 in funds drawn from the federal

government, states have disbursed $1.60 for project construction.

The SDWA requires that states give priority to projects that protect public health, ensure compliance

with the SDWA, and help systems with the greatest economic need on a per household basis. EPA takes

the view that all of the projects funded through the program will, in some way, benefit public health

now and in the future. More than one-third of the agreements funded have gone to systems that are out

of compliance with health-based drinking water standards, to develop projects that will return or bring

them into compliance. With respect to addressing economic need, 26 percent of all loans have been

provided to systems identified as disadvantaged. The program has also given many small systems access

to infrastructure financing and technical assistance through the set-asides.
DWSRF Report to Congress

iv

▼ Program Issues and the Future

As with any new program, states have faced challenges in implementing the DWSRF program. States

have had to make decisions on how to direct funds and structure programs in a manner that addresses

their highest priority needs and ensures that funds will be available to provide assistance in the future.

At times, these goals can compete with one another, particularly in determining how much of the

funding to direct to set-asides, and in making decisions on the types and amount of assistance provided

to disadvantaged systems.

EPA has tried to work in partnership with states to identify solutions to several issues impacting

implementation of the program. Addressing future challenges will likewise require partnerships between

public water systems; local, state and federal governments; and the general public. These challenges

include addressing drinking water infrastructure needs, ensuring the sustainability of public water

systems, and ensuring the security of facilities. While the DWSRF primarily addresses the first of these

challenges, it can also be structured and implemented in a manner that addresses the others as well.

For example, states are using DWSRF set-aside funds to implement capacity development strategies

focused on improving the technical, financial, and managerial capacity of water systems. States can

encourage use of tools that enhance sustainability such as rate structuring, asset management,

consolidation, public-private partnerships, privatization (where appropriate), and use of affordable

technology through their DWSRF set-asides or by including conditions within infrastructure loans.

With respect to security, states can help systems assess their vulnerability to security threats and then

take measures to address those threats.

The report discusses several issues that arose during the early years of program implementation as well as

issues raised by states and other stakeholders that could benefit from changes to current law. For

example, EPA agrees with stakeholders that have requested an extension of the flexibility to transfer funds

between the two SRF programs. EPA has worked through many issues affecting the program using the

support of a state/EPA work group on SRF implementation. The Agency has also worked to reach out

and coordinate with other stakeholders and their representative associations and has developed reports

and fact sheets to reach parties beyond state DWSRF program managers.

EPA looks forward to addressing other issues which may arise in the future and identifying ways to

enhance implementation of this important public health program. While the program already supports

many principles that guide how we look towards the future, states and EPA can work to enhance the

DWSRF as a tool through which to encourage integrated use of all local, state, federal, and private

sources of funding; promote use of innovative and efficient technology; encourage rates that are

appropriate to cover the costs of supplying drinking water; promote comprehensive strategic planning;

and help states to manage their public health programs.
v

Contents of Report

Executive Summary i

Tables vi

Figures vii

Acronyms ix

1 Introduction 1

2 Establishment of the DWSRF 3

3 DWSRF Basics 7

4 Features of State Programs 17

5 Financial Status 25

6 Types of Fund Assistance 31

7 Recipients and Projects Receiving Assistance 35

8 Financial and Programmatic Effectiveness 47

9 Status of Set-Aside Funds 59

10 Set-Aside Activities Funded 65

11 Implementation Issues 79

12 Future of the DWSRF 89

Appendix A: State DWSRF Program Summaries

Appendix B: DWNIMS Reports

Appendix C: References

The Drinking Water State Revolving Fund Program:

Financing America’s Drinking Water From the Source to the Tap
vi

TABLES

2-1 Public Water System Inventory Data 3

2-2 Comparison Between CWSRF and DWSRF Programs 6

3-1 Fiscal Year 1997 Capitalization Grants 8

3-2 National Set-Asides 8

3-3 State Allotment Percentages 9

3-4 Eligible Project Categories 11

3-5 Set-Aside Categories and Eligible Activities 12

4-1 Features of State DWSRF Programs 16

4-2 Agencies Implementing the DWSRF Program 18, 19

4-3 Sources and Uses of Fees 20

4-4 States Using Leveraging 22

5-1 Capitalization Grants (through FFY 2001) 25

5-2 Sources of State Match 26

5-3 Bond Proceeds Through Leveraging 27

5-4 States Using Transfers 27

5-5 Summary of Sources and Uses 29

6-1 Types of Fund Assistance 31

6-2 Disadvantaged Assistance (D.A.) 34

8-1 Grant Equivalence of DWSRF Loans 55

Tables and Figures
vii

FIGURES

3-1 Structure of the DWSRF Program 10

3-2 Overview of the DWSRF 13

3-3 Timeframes within the DWSRF Program 14

4-1 Sources of Annual Administrative Expenses 21

4-2 Sources of State Match (# of States) 21

6-1 Monthly Bond Buyer Index 32

6-2 Annual DWSRF Weighted Average Interest Rates 32

6-3 Disadvantaged Assistance (D.A.) 34

7-1 Assistance to CWS and NCWS (% Loans) 35

7-2 CWS Ownership 35

7-3 CWS Ownership by Size 35

7-4 Assistance to Privately-owned Systems 36

7-5 Population Served as a Function of System Size 37

7-6 DWSRF Assistance by System Size 38

7-7 Comparison of Needs to Assistance by System Size 38

7-8 Needs by Category (% Dollars) 39

7-9 DWSRF Assistance by Category (% Dollars) 40

7-10 Type of Assistance 42

7-11 Coordinated Funding 44

8-1 Milestones in the DWSRF Process 48

8-2 Cumulative Appropriations and Awards 48

8-3 Utilization of Funds 49

8-4 Assistance as a % of Funds Available 49

8-5 Project Status Milestones 50

8-6 Utilization of Funds Leveraged vs. Non-Leveraged Programs 50

9-1 Funds Reserved for Set-Asides 59

9-2 Funds Expended for Set-Asides 60

9-3 Cumulative Set-Aside Expenses 60

9-4 Administrative Set-Aside 60

9-5 Small System Technical Assistance Set-Aside 60

9-6 State Program Management Set-Aside 62

9-7 Local Assistance and Other State Programs Set-Aside 63

11-1 DWSRF Identification of Fundable Projects 84

12-1 DWSRF Support of the Mission to Ensure Safe Drinking Water 89
viii

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ix

Acronyms

ACH Automated Clearing House

ASAP Automated Standard Application for Payments

AWWA American Water Works Association

CCR Consumer Confidence Report

CWA Clean Water Act

CWS Community Water System

CWSRF Clean Water State Revolving Fund

D.A. Disadvantaged Assistance

DWNIMS DWSRF National Information Management System

DWSRF Drinking Water State Revolving Fund

EPA U.S. Environmental Protection Agency

FY Fiscal Year

FFY Federal Fiscal Year

FR Federal Register

GAO General Accounting Office

GIS Geographical Information System

HUD U.S. Housing and Urban Development

IUP Intended Use Plan

LA Local Assistance

LOC Letter of Credit

MTBE Methyl Tertiary-Butyl Ether

NCWS Non-Community Water System

NTNCWS Non-Transient Non-Community Water System

PPL Project Priority List

PWS Public Water System

PWSS Public Water System Supervision

RUS U.S. Department of Agriculture's Rural Utility Service

SDWA Safe Drinking Water Act

SDWIS Safe Drinking Water Information System

SDWIS/FED Safe Drinking Water Information System/ Federal Version

SFY State Fiscal Year

SPM State Program Management

SRF State Revolving Fund

SSTA Small System Technical Assistance

TNCWS Transient Non-Community Water System
x

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Chapter 1 — Introduction

1

1 Introduction

West Virginia

Founded in 1888, the Town of Bramwell was home to coal barons and

their fortunes during the early 1900’s; most evidence of these past riches

has all but disappeared. Bramwell’s water system had several serious

problems. The town originally had two sources of drinking water to

serve its 273 customers. The primary source, a ground water well, had a

treatment plant which did not need a full-time operator. The surface

water source, an impoundment, was used only in emergencies. In 1996,

the finished water tasted and smelled like petroleum and the well,

determined to be contaminated, was taken offline and sealed. This left

Bramwell relying solely on its surface source, which tended to dry up in

the summer and during drought conditions. Additionally, the surface

water treatment plant was over 30 years old and in poor condition

despite the thousands of dollars spent to upgrade it and required a full

time class II operator, which Bramwell could not afford. Because the

plant had no operator, the town was under a boil water advisory for

extended periods of time. On top of these problems, the system was

losing 50% of its treated water due to a deterioriated distribution system.

Another small water system, the Bluewell Community System (serving

95 customers), was under an Administrative Order from the West

Virginia Bureau for Public Health for state drinking water violations.

The Bluewell water source was under the influence of surface

contamination and did not provide the required filtration. To ensure that

the residents in these two “run down” systems had access to a reliable and

safe source of drinking water, a plan was developed to consolidate both

systems with the Bluewell Public Service District (PSD), a well-operated

system with an adequate water supply. A 32,000 foot water main was

extended from the Bluewell PSD to Bramwell and the Bluewell

Community System customers. The extension was also able to provide

service to 36 new customers who were not previously connected to any

public water supply. The project was funded by a $1.3 million DWSRF

loan as well as a $1.25 million U.S. Housing and Urban Development

Small Cities Block Grant.

Addressing Multiple Compliance Problems in West Virginia

The United States has one of the safest water supplies in the world. This fact is a testament to the efforts

of thousands of people who at the local, state, and federal levels have worked to ensure that citizens have

access to safe and clean drinking water. Ensuring that drinking water remains safe in the future is the

shared responsibility of local

citizens, private business, local

government, and state and federal

agencies.

In the 1996 Amendments to the

Safe Drinking Water Act

(SDWA), Congress authorized a

new federal funding program to

give states resources with which to

address their most pressing public

health needs. The Drinking

Water State Revolving Fund

(DWSRF) program represents the

first significant federal source of

funding for drinking water

infrastructure administered by

states. Through federal fiscal year

(FFY) 2001, Congress

appropriated $4.4 billion for the

program*. With additional

contributions, including state

matching funds and proceeds

from issuing bonds, states have

made more than $5.2 billion

available for funding infrastructure

projects needed to help protect

public health and ensure

compliance with the SDWA.

States have also reserved $576

million to fund activities and

*Appropriations through FFY 2002 are $5.3 billion.
DWSRF Report to Congress

2

programs that support drinking water programs, enhance water system management, and protect sources

of drinking water.

In the SDWA Amendments, Congress required that EPA report on the status of state loan funds through

FFY 2001. This Report to Congress describes the progress that states have made since the first grant was

awarded in March 1997. This report uses information provided to EPA by states for the DWSRF

National Information Management System (DWNIMS), an annual collection of DWSRF data based on

a state fiscal year (SFY), which runs from July to June. Because the DWNIMS is used as the primary

resource for information, except where noted otherwise, this report reflects data collected through June

30, 2001 (i.e., SFY 2001).

This report gives an overview of the DWSRF program and attempts to answer several questions,

including:

• Why did Congress create the DWSRF program?

• What are the basic characteristics of the DWSRF program?

• How have states structured their DWSRF programs?

• What types of assistance are states providing, who is getting the assistance, and what are the dollars

doing?

• How effective, both financially and programmatically, are state DWSRF programs?

• How are set-asides being used and what are they accomplishing?

• What issues have been associated with implementation of the program?

• What is the future of the DWSRF program?

This report reflects the national status of the program. One of the important things to understand is

that there is no one DWSRF program—the national program is comprised of 51 DWSRF programs, one

for each of the 50 states and Puerto Rico. Each is unique, which is to be expected given that the

program is intended to give states flexibility with accountability. The main body of this report discusses

the status of the national program. Chapters 2 through 4 provide background information on the

national program and the structure and features of state programs. Chapters 5 through 8 provide

detailed information on the status of state revolving loan funds, the types of activities funded by states,

and an assessment of the financial and programmatic effectiveness of the program. Chapters 9 and 10

discuss the uses of funds set aside from state grants to conduct other programs and activities that support

drinking water and health protection. Finally, Chapters 11 and 12 discuss some of the issues associated

with implementation of the program and challenges for the future. Overviews of each states’ program are

provided in Appendix A. While the snapshots cannot tell the entire story of a state’s program, they

provide a starting point for further investigation. Appendix B provides the full suite of reports (national

and state by state) generated by the DWNIMS reporting system, the national results of which are

provided within the text of this report. Appendix C provides a list of all documents referenced in this

report.
Chapter 2 — Establishment of the DWSRF

3

2 Establishment of the DWSRF

System size Very Small Small Medium Large Very Large Total

by population served 500 or less 501-3,300 3,301-10,000 10,001-100,000 >100,000

# systems 31,262 14,241 4,498 3,432 350 53,783

Pop’n served 5,094,790 20,096,911 26,092,461 96,516,416 116,344,551 264,145,129

% of systems 58% 26% 8% 6% 1% 100%

% of pop’n 2% 8% 10% 37% 44% 100%

# systems 17,133 2,847 93 19 3 20,095

Pop’n served 2,386,179 2,814,630 459,388 545,943 380,046 6,586,186

% of systems 85% 14% 0% 0% 0% 100%

% of pop’n 36% 43% 7% 8% 6% 100%

# systems 88,729 2,691 121 49 3 91,593

Pop’n served 7,471,798 2,702,365 667,436 1,242,141 735,001 12,818,741

% of systems 97% 3% 0% 0% 0% 100%

% of pop’n 58% 21% 5% 10% 6% 100%

Total # systems 137,124 19,779 4,712 3,500 356 165,471

CWS NTNCWS TNCWS

Table 2-1 Public Water System Inventory Data

Active, current systems, from Safe Drinking Water Information System/Federal version (SDWIS/FED) FFY 01Q4 frozen inventory table.

CWS = Community Water System: A public water system that supplies water to the same population year-round.

NTNCWS = Non-Transient Non-Community Water System: A public water system that regularly supplies water to at least 25 of the same

people at least six months per year, but not year-round. Some examples are schools, factories, office buildings, and hospitals which have

their own water systems.

TNCWS = Transient Non-Community Water System: A public water system that provides water in a place such as a gas station or

campground where people do not remain for long periods of time.

Note: Some numbers may not add exactly due to rounding.

The United States has more than 165,000 public water systems. These systems can be divided into

three types: community, non-transient noncommunity, and transient noncommunity. Table 2-1

presents the definition of each type of water system, the number of systems, and the population served

by those systems. The table shows that the universe of water systems is diverse. This diversity is

apparent when looking at how systems are distributed as a function of the population they serve. The

vast majority of systems are very small systems that serve fewer than 3,300 people. However, the

majority of the population (81%) is served by the seven percent of community water systems that serve
DWSRF Report to Congress

4

more than 10,000 people. Many smaller water systems face challenges because they lack the economies

of scale that systems serving larger communities have. Large systems may also face challenges in making

upgrades to aging infrastructure. Some of these large systems can also be challenged by having to spread

costs across a declining population base as residents move out of large cities.

A substantial amount of money has gone into building the infrastructure needed for our nation’s water

systems. Most of this capital spending has been financed through local sources, including water rates

and tax revenues. Before the DWSRF program was established, the primary source of federal funding for

drinking water was through the U.S. Department of Agriculture’s Rural Utility Service (RUS), which

focuses on building systems to serve rural communities. According to a General Accounting Office

(GAO) report issued in 2001, between fiscal years 1991 and 2000, the RUS provided more than $11.5

billion in grants and low interest loans for drinking water and wastewater infrastructure projects. The

U.S. Department of Housing and Urban Development’s Community Development Block Grant

program provided $4 billion in block grants for drinking water and wastewater over the same time

period.

With passage of the Clean Water Act (CWA) in 1972, there was a recognition on the part of the nation

and the federal government that many of our surface and coastal waters were in serious trouble. Many

water bodies were not safe for fishing, swimming, or as sources of drinking water. In order to reduce

loadings of pollutants to waterbodies, the federal government initiated the Construction Grants program

to construct and upgrade wastewater treatment facilities throughout the nation. Between 1972 and

1990, EPA awarded $50 billion in grants to communities to help them construct and improve their

facilities for treating wastewater. Tremendous improvements in surface waters over the past 30 years are

a direct benefit of investment through EPA’s Construction Grants program.

In the late 1980’s, Congress made a decision to replace the

Construction Grants program with a new program that states

could use to address their most critical water quality needs.

The Clean Water State Revolving Fund (CWSRF) program

was authorized in the 1987 Amendments to the CWA. The

program replaced direct grants to municipalities with grants to

states to establish revolving loan funds. States are responsible

for setting priorities, selecting projects and managing the

programs which fund the construction of projects for publiclyowned treatment works and projects to address estuarine and

nonpoint source pollution problems.

Since 1988, Congress has appropriated more than $18 billion for the CWSRF program. With the

federal dollars serving as seed money for their revolving funds, states have been able to provide more than

$34 billion in assistance to fund about 11,000 projects. The program is widely viewed as a successful

partnership of federal and state government in addressing important environmental problems.

In 1996, the SDWA underwent significant revisions which included changes to EPA’s approach for

What is a revolving fund?

Revolving funds are not unique to EPA.

A revolving fund is essentially an

account that is repeatedly expended,

replenished, and then expended again.

For the EPA programs, funds deposited

into the SRF are loaned at low interest

rates to eligible borrowers. Loan

principal repayments and interest

revenues are subsequently used to

make new loans.*

*A more technical definition identifies a revolving fund as an expenditure account that is credited with offsetting collections that are generated by,

and earmarked to finance, a continuing cycle of business-type operations.
Chapter 2 — Establishment of the DWSRF

5

setting health-based standards for contaminants in drinking water. Fundamental to the framework for

the SDWA Amendments was the recognition that drinking water protection is better achieved through a

multi-barrier approach—by addressing protection from the source of drinking water to the tap. New

programs were established to encourage practices that would enhance the management of water systems.

States were required to develop programs to: (1) improve the technical, financial, and managerial capacity

of water systems to ensure that they are sustainable, and (2) ensure that operators of such systems are

adequately trained. Because preventing contamination of a drinking water source may be more costeffective than treating a source that has been contaminated, the SDWA Amendments also required that

states assess the potential sources of contamination for all drinking water sources within their borders.

Congress also recognized that there was a need for funding drinking water infrastructure to help systems

protect public health and ensure compliance with the requirements of the Act. The SDWA

Amendments established the DWSRF program to help states and public water systems advance drinking

water protection. The state-run program is intended to help states finance high priority drinking water

infrastructure projects.

The DWSRF program was modeled in part after the CWSRF program. However, there are significant

differences between the two programs (Table 2-2, page 6). One of the most significant differences is the

flexibility given to states to use a portion of their grant funds (i.e., set-asides) to help advance the other

new programs authorized by the Amendments. States were also given additional authority to address the

particular needs of disadvantaged communities for infrastructure funding. In order to help identify the

infrastructure needs in the country, the SDWA Amendments required that EPA conduct a survey of

drinking water infrastructure needs in each state. The results of the survey are used to determine the

amount of funding each state receives from annual appropriations for the DWSRF program, with the

condition that each state receive a minimum of one percent of the funds available to states.
DWSRF Report to Congress

6

CWSRF DWSRF

Initiated 1988 1997

Authorization $8.4 billion (FFY 1989-1994) $9.6 billion (FFY 1994-2003)

Appropriations through FFY 2001 $18 billion $4.4 billion

Assistance provided through SFY 2001 > $34 billion > $3.8 billion

Eligible Uses of Fund Loans, Refinance, Insurance, Loans, Refinance, Insurance,

(types of assistance) Guarantee, Purchase Debt, Guarantee, Purchase Debt,

Security for Leveraging, Security for Leveraging

4% grant for administration

Loan Terms Interest between 0% and Interest between 0% and market

market rate, 20 year terms rate, 20 year terms, 30 year terms

for disadvantaged systems

Eligible Systems Publicly-owned treatment Publicly and privately-owned

works community and non-profit

Communities, individuals, noncommunity drinking water

non-profit groups, etc. systems

Eligible Projects Projects for wastewater Projects to upgrade/replace

treatment plants drinking water source, treatment,

Nonpoint source and estuary storage, transmission and

projects identified in state distribution

nonpoint source or comprehensive

conservation and management plans

Ineligible Projects O&M Dams, Reservoirs (unless for

finished water), Water Rights

(unless purchase through

consolidation), O&M

Set-Asides No Yes, up to 31% of grant (for

administering DWSRF, public water

system supervision, source water

protection, capacity development,

operator certification programs)

Disadvantaged Assistance No Yes, up to 30% of grant (principal

forgiveness), 30 year repayment terms

Transfers between SRFs* Yes (up to 33% of DWSRF Yes (up to 33% of DWSRF

grant amount) grant amount)

Table 2-2 Comparison Between CWSRF and DWSRF Programs

*Although the statutory provision sunset in FFY 2001, the ability to transfer was extended through the FFY 2002

appropriation and the FFY 2003 President’s Budget request.
Chapter 3 — DWSRF Basics

7

The authorizing legislation for the DWSRF program is in section 1452 of the SDWA Amendments,

which were passed on August 6, 1996. Following passage of the Amendments, EPA moved rapidly to

develop the DWSRF program so that states could receive funding from the FFY 1997 appropriation.

EPA convened a work group of state and EPA staff in the fall of 1996, which released Interim Guidelines

for the program on October 4, 1996 to give states the information they needed to begin developing

programs. EPA subsequently held a series of public meetings with stakeholders to provide information

about the program and to review the Interim Guidelines. Comments received during the period of

public comment and from attendees of the public meetings were critical in developing the DWSRF

Program Final Guidelines (EPA-816-R-97-005; 63 FR 59844), which were signed by the Assistant

Administrator for Water on February 28, 1997.

3 DWSRF Basics

The Borough of Williamsburg has served its

residents and parts of neighboring Woodbury

and Catherine Townships with its water

system for more than 90 years. For most of

that time, water was supplied by two

reservoirs located on Tussey Mountain. In the

late 1960’s, two ground water wells were

constructed to supplement the reservoirs. In

the 1980’s, the reservoirs were abandoned

due to Giardia contamination and the poor

condition of the transmission lines. Even

after the abandonment of the reservoirs, many

of the existing lines were undersized and in

poor condition, resulting in pressure, flow,

and leak problems in some areas. The

Borough received a $4.2 million DWSRF

loan in May 1997—the first DWSRF loan in

the nation. The project included the

installation of a booster pumping station, a

210,000 gallon water storage tank, eight

miles of water mains, and the replacement of

every water meter in the system. The project

was completed in the spring of 1998.

First DWSRF Loan in the Nation –

Borough of Williamsburg,

Pennsylvania

Pennsylvania The development of a regulation for the program was

initiated in the spring of 1998. A work group of state and

EPA staff participated in reviewing and commenting on

drafts of the rule through 1998. A more complete draft of

the rule was posted on the EPA website for a 45 day public

comment period on April 12, 1999. An interim final rule

was published in the Federal Register on August 7, 2000

(65 FR 48285). The Agency received no significant

comments during the comment period and published a

notice in the Federal Register on January 12, 2001 to

indicate that the interim final rule stood as final (66 FR

2823). The regulations have been codified in the Code of

Federal Regulations at 40 CFR Part 35, Subpart L.

The first DWSRF grant was awarded to the State of

Georgia on March 6, 1997, and on May 22, 1997,

Pennsylvania made the first loan in the program to the

Borough of Williamsburg. By the end of FY 1997, 18

states had received their initial capitalization grant (Table

3-1). In the early stages of the program, many states

needed time to make the necessary legislative and

regulatory changes before they could receive a grant. States

that had preexisting funding programs generally had a

head start over states that had to develop a new program

from the ground up.
DWSRF Report to Congress

8

FFY 1997 - 1st year of availability FFY 1998 - 2nd year of availability

10/1- 1/1- 4/1- 7/1- 10/1- 1/1- 4/1- 7/1-

12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98

Georgia Pennsylvania (p) Washington (s) Hawaii Arizona New Mexico Nebraska Kentucky

Maryland (s) Michigan (s) Connecticut (s) Minnesota Connecticut (p) Iowa

Mississippi Kansas Oklahoma (p) Washington (p) New Hampshire (p) Massachusetts (p)

South Carolina Maine Utah Nevada Pennsylvania (s) Indiana

Idaho Rhode Island (s) New York Rhode Island (p) West Virginia New Jersey

Colorado North Carolina (s) Michigan (p) Massachusetts (s) Ohio

South Dakota Virginia (s) Oregon North Carolina (p) Wisconsin

Alaska (p) Montana Alabama Arkansas

Illinois North Dakota California

Maryland (p) Florida Puerto Rico

New Hampshire (s) Wyoming Missouri

Oklahoma (s) Louisiana Delaware

Tennessee Alaska (s)

Texas

Vermont

Virginia (p)

Table 3-1 Fiscal Year 1997 Capitalization Grants*

* (p=projects, s=set-asides, all others are complete awards)

FFY 1997 FFY 1998 FFY 1999 FFY 2000 FFY 2001 TOTAL

Appropriation $1,275,000,000 $725,000,000 $775,000,000 $820,000,000 $823,185,000 $4,418,185,000

American Indian and $19,125,000 $10,875,000 $11,625,000 $12,300,000 $12,347,700 $66,272,700

Alaska Native Villages

Monitoring for $0 $2,000,000 $2,000,000 $2,000,000 $1,995,600 $7,995,600

Unregulated Contaminants

Small System $0 $0 $0 $0 $0 $0

Technical Assistance

Health Effects Studies $0 $0 $0 $0 $0 $0

Operator Certification $0 $0 $15,000,000 $30,000,000 $29,934,000 $74,934,000

Reimbursement Grants

Total National Set-Asides $19,125,000 $12,875,000 $28,625,000 $44,300,000 $44,277,300 $149,202,300

Funds Available to States, $1,225,875,000 $712,125,000 $746,375,000 $775,700,000 $778,907,700 $4,268,982,700

DC and Territories

Table 3-2 National Set-Asides
Chapter 3 — DWSRF Basics

9

▼ Program Overview

States are eligible to receive

capitalization grants from funds

annually appropriated by Congress.

The national appropriation is reduced

by national set-asides (Table 3-2).

With the exception of FFY 1997, states

receive a grant allotment that is

proportional to the total state need

identified in the most recent survey of

drinking water infrastructure needs

conducted every four years in

accordance with the law (Table 3-3).

For 1997, pursuant to the statute,

states were allotted funds based on

their allotment percentage for Public

Water System Supervision (PWSS)

grants. Results from the first needs

survey, released in 1997, were used for

FFY 1998 through FFY 2001

allotments. The first needs survey

identified a 20 year national need of

$138.6 billion (1995 dollars). Results

from the second needs survey, released

in February 2001 (EPA 816-R-01-

004), will be used to determine FFY

2002 through FFY 2005 allotments.

The new survey identified a national

need of $150.9 billion (1999 dollars),

with 20 year needs for individual states

ranging from $147 million (Hawaii) to

$17.5 billion (California).

States have two years in which to

receive a grant—the year in which the

funds are appropriated and the

following year. In order to receive a

grant, a state must agree to deposit

matching funds equal to 20 percent of

the grant into their state revolving loan

funds. States distribute grant funds

PWSS Formula 1995 Survey 1999 Survey

FFY 1997 FFY 1998- FFY 2002-

FFY 2001 FFY 2005

Alabama 1.00% 1.19% 1.00%

Alaska 2.15% 1.00% 1.00%

Arizona 1.35% 1.02% 1.13%

Arkansas 1.00% 1.42% 1.08%

California 6.03% 10.83% 10.24%

Colorado 1.34% 1.35% 1.65%

Connecticut 1.70% 1.00% 1.00%

Delaware 1.00% 1.00% 1.00%

Florida 3.59% 2.90% 2.34%

Georgia 2.05% 2.14% 1.58%

Hawaii 1.00% 1.00% 1.00%

Idaho 1.13% 1.00% 1.00%

Illinois 3.07% 3.48% 3.73%

Indiana 2.05% 1.22% 1.17%

Iowa 1.34% 1.58% 1.84%

Kansas 1.12% 1.41% 1.15%

Kentucky 1.00% 1.52% 1.22%

Louisiana 1.63% 1.40% 1.00%

Maine 1.01% 1.00% 1.00%

Maryland 1.40% 1.00% 1.16%

Massachusetts 1.14% 3.85% 3.58%

Michigan 4.75% 2.94% 4.10%

Minnesota 3.35% 1.66% 1.98%

Mississippi 1.31% 1.16% 1.00%

Missouri 1.74% 1.34% 1.45%

Montana 1.18% 1.00% 1.00%

Nebraska 1.02% 1.00% 1.00%

Nevada 1.00% 1.00% 1.00%

New Hampshire 1.10% 1.00% 1.00%

New Jersey 2.23% 2.44% 2.30%

New Mexico 1.02% 1.00% 1.00%

New York 4.71% 6.33% 7.75%

North Carolina 3.67% 1.81% 1.76%

North Dakota 1.00% 1.00% 1.00%

Ohio 3.43% 3.20% 3.05%

Oklahoma 1.40% 1.44% 1.55%

Oregon 1.51% 1.48% 1.76%

Pennsylvania 4.24% 3.15% 3.22%

Puerto Rico 1.00% 1.44% 1.33%

Rhode Island 1.00% 1.00% 1.00%

South Carolina 1.18% 1.08% 1.00%

South Dakota 1.00% 1.00% 1.00%

Tennessee 1.02% 1.34% 1.01%

Texas 5.59% 7.58% 7.70%

Utah 1.00% 1.00% 1.00%

Vermont 1.00% 1.00% 1.00%

Virginia 2.34% 1.95% 1.38%

Washington 2.48% 2.69% 2.47%

West Virginia 1.00% 1.00% 1.00%

Wisconsin 3.31% 1.34% 1.98%

Wyoming 1.00% 1.00% 1.00%

District of Columbia 1.00% 1.00% 1.00%

Territories 0.33% 0.33% 0.33%

Table 3-3 State Allotment Percentages
DWSRF Report to Congress

10

*Repayments return to Fund for future assistance

Federal EPA Grant STATE

Revolving Loan Fund

(includes repayments,

bond proceeds, interest, etc.)

Set-asides (up to 31%)

Administration of DWSRF

Small system tech assistance

Source water assessments

Source water protection

Drinking water program

Capacity development

Operator certification

Add 20%

State match

Assistance to Public Water Systems

Treatment

Sources

Storage

Transmission & distribution

•

•

• •

•

•

•

•

•

•

•

*

Figure 3-1 Structure of the DWSRF Program

between (1) the Fund, from which monies are used to finance infrastructure projects, and (2) set-asides,

which finance other programs and activities (Figure 3-1).

States are required to develop an annual Intended Use Plan (IUP) that describes how funds in the

program will be used, including a comprehensive list of infrastructure projects eligible for funding and a

fundable list of the highest priority projects expected to receive funding in that year. This IUP must be

made available for public review and comment prior to being finalized, and is required for receipt of a

capitalization grant from EPA. States must also develop a biennial report describing how funds have

been used.

In order to receive a capitalization grant, states must provide a number of assurances to EPA. States must

show that they have the ability to manage the program and that they will comply with statutes and

regulations applicable to the program. With the exception of funds used for set-asides, states must agree

to deposit all program funds into their Fund and must agree to

requirements related to the timing of providing assistance. The

state must agree to use generally accepted accounting principles

and to conduct audits in accordance with the Single Audit Act

(per requirements of the Office of Management and Budget). As

a best management practice, EPA encourages all states to

conduct independent audits of their programs to ensure their

financial integrity. The full set of requirements can be found in

the program regulations.

States are also required to meet certain conditions to avoid

withholding of DWSRF grant funds. The 1996 SDWA

What are the “Fund” and “SetAsides”?

In this report we refer to a state’s

revolving loan fund as the Fund. Setasides refer to those grant funds that

are not deposited into the Fund, but

are instead used to support other

drinking water activities. Use of the

term “DWSRF program” refers to the

state program and activities

conducted through the Fund and/or

set-asides.
Chapter 3 — DWSRF Basics

11

Amendments included new requirements relating to state capacity development and operator

certification programs (SDWA sections 1419 and 1420). States that fail to meet requirements related to

the development and on-going implementation of these programs are subject to a withholding of

DWSRF grant funds ranging from 10 to 20 percent. Conceivably, a state that fails to meet requirements

for both programs could be subject to a withholding of 40 percent of their DWSRF grant. To date,

because all states have met program requirements, none has been subject to grant withholding.

In order to give states flexibility to address their greatest public health and water quality priorities,

Congress also gave states the ability to transfer an amount equal to 33 percent of their DWSRF grant to

the CWSRF Fund, or an equivalent amount from the CWSRF Fund to the DWSRF Fund. A report to

Congress on the use of the provision, Implementation of Transfers in the Clean Water and Drinking Water

State Revolving Fund Programs (EPA 816-R-00-021), was released in October 2000. While the SDWA

did not allow for transfers after September 30, 2001, Congress extended the provision for an additional

year through EPA’s FFY 2002 appropriation as requested by the Administration for FFY 2002 and in

the FY 2003 President’s Budget.

▼ Fund Assistance

To ensure that the most critical infrastructure needs are addressed, states are required to fund the highest

priority projects pursuant to a priority system that reflects criteria provided for by law. States must give

priority to projects that (1) address the most serious risks to public health, (2) are necessary to ensure

compliance with the requirements of the SDWA, and (3) assist systems most in need on a per household

basis.

The law allows states to provide funding to publicly- or privately-owned community water systems and

non-profit noncommunity water systems for eligible projects. Entities that will create a new community

water system to address a public health problem caused by unsafe sources of water can also receive

assistance.

The law provided that funds could be used for

projects of a type or category that the EPA

Administrator determines would facilitate

compliance with national primary drinking

water regulations applicable to the system or

otherwise significantly further the health

protection objectives of the Act. The work

group tasked with developing the initial

guidelines for the program identified five basic

categories of eligible projects (see Table 3-4).

Other types of projects have been identified as

ineligible for assistance from the Fund. The

law specifically excluded expenditures for

monitoring, operations, and maintenance and

indicated that the DWSRF could not be used

to fund projects where the primary purpose was

Treatment

• Projects to maintain compliance with regulations for

contaminants that cause acute and chronic health

effects

Transmission and Distribution

• Installation or replacement of transmission and

distribution mains

Source

• Rehabilitation of wells or development of sources to

replace contaminated sources

Storage

• Installation or improvement of eligible storage facilities

Consolidation

• Consolidation of water supplies if a water supply has

become contaminated or if a system is unable to

maintain technical, financial, or managerial capacity

Table 3-4 Eligible Project Categories
DWSRF Report to Congress

12

to facilitate growth. The Administrator identified additional types of projects as ineligible, including the

construction or rehabilitation of dams and reservoirs (unless the reservoir is for finished water or part of

the treatment process); water rights (except if owned by a system being purchased through

consolidation); and projects needed primarily for fire protection.

With the exception of disadvantaged assistance, assistance provided in the form of loans must have

interest rates that are between zero and market rates and repayment terms that do not exceed 20 years.

With the exception of privately-owned systems, states may refinance existing debt where the debt

obligation was incurred and the project was initiated after July 1, 1993. States can use Fund assets to

issue bonds to increase the amount of funds available for assistance, provided that the net bond proceeds

are deposited into the Fund. States may also use the Fund to purchase insurance or loan guarantees for

debt obligations which help to reduce interest rates.

Assisting small systems and systems with economic need is a priority for the program. The law requires

that states provide a minimum of 15 percent of available funds to systems serving 10,000 or fewer

persons. A state may use up to 30 percent

of its grant to provide additional assistance

to systems the state has identified as

disadvantaged using criteria developed by

the state. Assistance to systems that have

been identified as serving disadvantaged

communities—using state-determined

affordability criteria—may receive

additional subsidies in the form of principal

forgiveness or negative interest rate loans.

States may also provide extended loan terms

of up to 30 years to systems serving

disadvantaged communities.

All projects funded through the program

must undergo an environmental review to

ensure that they will not have a negative

impact on the environment. States must

also apply more than 20 federal laws and

executive orders (i.e., federal cross-cutters)

to, at a minimum, an identified group of

projects receiving funding in an amount

equal to federal funds. These recipients

must, as a condition of receiving federal

assistance, comply with laws such as the

Endangered Species Act, the Archeological

and Historic Preservation Act, and executive

orders concerned with the protection of

wetlands, floodplain management, and

Table 3-5 Set-aside Categories and

Eligible Activities

Administration and Technical Assistance 4%

• Administer the DWSRF program and

provide technical assistance to public

water systems.

Small System Technical Assistance 2%

• Provide technical assistance to small

systems serving 10,000 people or fewer.

State Program Management 10%*

• Administer the state PWSS program.

• Administer and provide technical assistance

through source water protection programs.

• Develop and implement a capacity

development strategy or an operator

certification program.

Local Assistance and Other State Programs 15%**

• Delineate and assess source water

protection areas.

• Provide loans to systems to acquire

land or conservation easements.

• Provide loans to systems to assist in

voluntary, incentive-based source water

protection measures.

• Make expenditures to establish and

implement wellhead protection programs.

• Provide technical or financial assistance to

systems as part of a capacity development

strategy.

* States must provide a dollar-for-dollar match for expenditures made under

this set-aside.

** No more that 10% per activity per capitalization grant.

Maximum
Chapter 3 — DWSRF Basics

13

STATE

tate Set-asides

State

DWSRF

REPAYMENTS

LOANS

PWS

(Loan Recipient)

Contractor

State determines

level of set-aside use

State develops a

project priority list

based on public

health, compliance

and affordability

State presents plan

with intended uses

of project & set-aside

funds to public

State submits

application to

EPA for approval State is awarded

DWSRF grant

Capitalization Grant -

state allotment based

on % of national need

State must provide

a 20% match to

federal funds

Up to 31% of grant for

activities supporting

source water protection

and PWSS management

Loans can range

from 0% to market rate State can issue

bonds to increase

the amount of

$ for loans Special allowances

for small and

disadvantaged

systems

Terms generally limited to

20 years. Begin one year

after project completion. Paid as costs

incurred

PPL

Figure 3-2 Overview of the DWSRF
DWSRF Report to Congress

14

minority- and women-owned business enterprises. All recipients must comply with several specific

federal anti-discrimination laws, including the Civil Rights Act and the Age Discrimination Act.

▼ Set-Aside Assistance

In order to provide states with the resources to address other programs that support drinking water

protection, states have the option to use up to 31 percent of their grants to fund set-aside activities that

support drinking water programs, enhance the management of water systems, or support programs that

protect sources of drinking water. There are four categories of set-asides—each of which carries a limit on

the amount of the capitalization grant that can be used for activities eligible under that set-aside (Table

3-5, page 12).

States must develop workplans describing how funds reserved from grants will be used. The workplans

can cover more than one year, provided that the state can account for how funds will be spent. If a state

does not have an immediate need for funds, but knows that it will in the future, it may reserve the

authority to take funds associated with the set-aside in the future.

▼ Flow of Funds

On a macro level the program appears fairly simple—EPA provides grants to states, states make loans to

recipients, recipients pay contractors, recipients repay loans to states, and states make more loans (Figure

3-2). However, a closer look is necessary because the flow of funds in the program is a complicated

process. Therefore, it is important to have a general understanding of how funds cycle through the

program (Figure 3-3). As noted before, states have two years in which to receive a grant award from a

specific appropriation. States then have the earlier of 8 quarters after the grant award or 12 quarters after

the allotment to take payments from the federal Treasury via an electronic funds transfer system (e.g., the

Automated Clearing House (ACH) or Automated Standard Application for Payments (ASAP)). It is

Fiscal

Year 1

Fiscal

Year 2

Fiscal

Year 3

Fiscal

Year 4

Fiscal

Year 5

Appropriation/

Apportionment/

Allotment $

Capitalization

Grant Award

Payments

Binding

Commitments

Cash Draws

Disbursements

Project Funding

Process

Award in year of appropriations or following year

Earlier of 8 quarters of grant award or 12 quarters of allotment

Entered into within 1 year of payment equal to grant and match used for projects

As costs are incurred

Generally follow the pattern of cash draws

Loan Agreement - Start construction - Project completion - Begin repayment in 1 year

Repayment in 20 years

Figure 3-3 Timeframes within the DWSRF Program
Chapter 3 — DWSRF Basics

15

important to note that, unlike most grant programs, a DWSRF program payment does not represent an

actual transfer of cash from the Treasury to the state. It simply gives the state the ability to draw an

amount equal to the payment when disbursing funds to recipients for incurred costs.

After taking a payment, a state has one year in which to make a binding commitment with a recipient to

fund a project. In most cases, a binding commitment is concurrent with execution of a loan agreement,

although the two steps are separate in some states. A state cannot disburse funds to a recipient prior to

execution of the loan agreement. However, after the loan is executed the recipient can be reimbursed for

approved costs that were incurred prior to execution of the loan agreement. A state can only draw funds

from the Treasury based on a request for reimbursement of incurred costs by the recipient. A recipient

must begin loan repayments no later than one year after completion of the project. Loan terms cannot

exceed 20 years, except in the case of disadvantaged communities, which may have loan terms extended

up to 30 years.
DWSRF Report to Congress

16

Program Features

Loan Program Set-Aside Program Disadvantaged Assistance Program

State Leveraged

Coordinated DWSRF with Other Federal and State Funds

Funds Private Systems*

Assessed Fees (on top of

or included within loans)

Issued State Match Bonds

Retired from DWSRF

Transferred Funds from CWSRF

Provides Principal Forgiveness*

Provides Loan Terms >20 Years*

Provides Lower Interest Rates*

Small Systems Technical

Assistance*

State Program Management*

Local Assistance - source water

delineation and assessments*

Local Assistance - source

water protection loans*

Local Assistance - capacity develop.

or wellhead protection activities*







 























































































































































































 



























































































































 



































































  

 















 



   



















































































































































































































 





















 

     















































































































AL

AK

AZ

AR

CA

CO

CT

DE

FL

GA

HI

ID

IL

IN

IA

KS

KY

LA

ME

MD

MA

MI

MN

MS

MO

MT

NE

NV

NH

NJ

NM

NY

NC

ND

OH

OK

OR

PR

RI

SC

SD

TN

TX

UT

VT

VA

WA

WV

WI

WY

PA

Program feature utilized as of June 30, 2001 as reported in DWNIMS

For columns with *, program feature established, but not utilized as of June 30, 2001

=

=

Table 4-1 Features of State DWSRF Programs
Chapter 4 — Features of State Programs

17

4 Features of State Programs

This chapter reviews several features of state programs including a discussion of how the programs are

structured administratively and financially. The chapter also reviews how states support their programs

in providing required matching funds and additional funds to help operate programs. Finally, this

chapter reviews how states are working to coordinate their DWSRF programs with new or preexisting

state funding programs or other federal financial assistance programs. Table 4-1 shows additional

features of state programs that are discussed throughout the report.

▼ Administrative Structure

As noted previously, there is no one model for how states have established their DWSRF programs. The

number of agencies involved in administering the program can vary from one to more than three.

However, in every state, in accordance with the law, the authority to establish assistance priorities and

related activities of the DWSRF program, other than financial administration of the Fund, resides with

the state agency having primary enforcement responsibility (i.e., primacy) for administration of the

state’s PWSS program. In most cases the primacy agency is located within a state’s Health or

Environment Department. Table 4-2 shows the agencies involved in administering each of the 51

programs. In some cases, as a financial management matter, the primacy agency is not the EPA grant

recipient, but the agency remains responsible for setting program priorities.

In the majority of states, the primacy agency cooperates with other state agencies to help manage the

program. States are required to develop agreements with other relevant agencies to clearly identify the

roles and responsibilities of each agency in running the program.

In many states, the DWSRF program is being managed out of the same agency that oversees the CWSRF

program. Other DWSRF programs are cooperating with the agency that oversees the CWSRF program,

primarily in the areas of financial management or environmental reviews. In New York, the Environmental Facilities Corporation, which manages the CWSRF program, assists the Department of Health in

financial management and accounting for loans.

In some cases, the complexity of a state’s program will require the participation of another state agency.

For example, states that issue bonds (i.e., leverage their grants) to increase the amount of funding for

projects will typically require the participation of a state agency to facilitate issuance of bonds. In Maine,

the Municipal Bond Bank works with the state Department of Health to manage additional funds made

available through leveraging.

Many states are implementing their DWSRF programs in coordination with state grant and loan

programs that were in existence prior to establishment of the DWSRF program. Twenty-five states
DWSRF Report to Congress

18

DWSRF CWSRF DWSRF

DWSRF DWSRF Financial Financial Environmental

State Agency Primacy Grantee Management Management Reviews

Alabama Department of Environmental Management XXXX X

Alaska Department of Environmental Conservation XXXX X

Arizona Department of Environmental Quality X

Water Infrastructure Finance Authority XXX X

Arkansas Department of Health X

Development Finance Authority X X

Soil and Water Conservation Commission X X

California Department of Health Services XXX X

State Water Resources Control Board X

Colorado Department of Public Health and Environment X X

Water Resource and Power Development Authority XXX

Connecticut Department of Public Health XX X

Department of Environmental Protection X X

Delaware Dept.of Health & Social Services X X

Department of Natural Resources & Environmental Control XX X

Florida Department of Environmental Protection XXXX X

Georgia Department of Natural Resources X X

Environmental Facilities Authority XXX

Hawaii Department of Health - Safe Drinking Water Branch XX X

Department of Health - Wastewater Branch X X

Idaho Department of Environmental Quality XXXX X

Illinois Environmental Protection Agency XXXX X

Indiana Department of Environmental Management XX X

State Budget Agency X X

Iowa Department of Natural Resources XXXX X

Finance Authority

Kansas Department of Health and Environment XX X X

Department of Administration - Development Finance Authority X

Kentucky Department of Natural Resources & Environmental Protection Cabinet X X

Infrastructure Authority XXX

Louisiana Department of Health & Hospitals X X

Department of Environmental Quality XX X

Maine Department of Human Services X X

Municipal Bond Bank X X

Department of Environmental Protection X

Maryland Department of the Environment - Water Quality Financing Admin. XXX

Department of the Environment - Water Management Admin. X X

Massachusetts Department of Environmental Protection X X

Water Pollution Abatement Trust XXX

Michigan Department of Environmental Quality XX X

Municipal Bond Authority X X

Minnesota Department of Health X X

Public Facilities Authority - Dept. of Trade and Economic Development XXX

Mississippi State Department of Health X X

Department of Environmental Quality XX X

Missouri Department of Natural Resources XXXX X

Montana Department of Environmental Quality XX X

Department of Natural Resources & Conservation X X

Nebraska Department of Environmental Quality XXX X

Department of Health and Human Services X

Table 4-2 Agencies Implementing the DWSRF Program
Chapter 4 — Features of State Programs

19

DWSRF CWSRF DWSRF

DWSRF DWSRF Financial Financial Environmental

State Agency Primacy Grantee Management Management Reviews

Nevada Department of Human Resources XXX X

Department of Conservation & Natural Resources X

New Hampshire Department of Env. Services - Water Supply Engineering Bureau XXX

Department of Env. Services - Wastewater Engineering Bureau X X

New Jersey Department of Environmental Protection XX X

Environmental Infrastructure Trust X X

New Mexico Environment Department X XX

Finance Authority X X

New York Department of Health XX X

Environmental Facilities Corporation X X

North Carolina Department of Environment and Natural Resources XXXX X

North Dakota Department of Health XX X

Municipal Bond Bank X X

Ohio Environmental Protection Agency XX X

Water Development Authority X X

Oklahoma Department of Environmental Quality XX X

Water Resources Board X X

Oregon Department of Human Services XX X

Economic and Community Development Department X

Department of Environmental Quality X

Pennsylvania Department of Environmental Protection X X

Infrastructure Investment Authority (Pennvest) XXX

Puerto Rico Department of Public Health X X

Infrastructure Finance Authority X X

Environmental Quality Board X

Rhode Island Department Of Health X

Department of Environmental Management X

Clean Water Finance Agency XXX

South Carolina Department of Health and Environmental Control XX X X

Budget and Control Board X

South Dakota Department of Environment & Natural Resources XXXX X

Tennessee Department of Environment & Conservation XXXX X

Texas Natural Resource Conservation Comm. X

Water Development Board XXX X

Utah Department of Environmental Quality XXXX X

Vermont Department of Env. Conservation - Water Supply Div. XX X X

Department of Env. Conservation - Facilities Engineering Div. X

Economic Development Authority X

Municipal Bond Bank X

Virginia Department of Health XX X

Resources Authority X X

Washington Department of Health X X

Department of Ecology X

State Dept. of Community, Trade and Econ. Development X

State Public Works Board X X

West Virginia Bureau for Public Health XX X

Water Development Authority X X

Environmental Protection X

Wisconsin Department of Natural Resources XX X

Department of Administration X X

Wyoming EPA Region 8 X

Department of Environmental Quality X

Office of State Lands & Investments X X

State Loan Investment Board X

Table 4-2 Agencies Implementing the DWSRF Program (continued)
DWSRF Report to Congress

20

reported other state funding programs in the DWNIMS. States with preexisting programs had an

advantage at the beginning of the program since they already had the structure and staff needed to

implement the program.

▼ Program Staffing and Funding

As a condition for receiving assistance a state must demonstrate that it has adequate personnel and

resources to manage the DWSRF program. EPA has not established a baseline number of personnel that

it believes is necessary to operate a program, but rather evaluates each program on its own merits. The

number of staff implementing the program varies widely. Fewer than 10 people manage a successful

program in Kansas while close to 40 manage a much larger and equally successful program in New York.

Many states have, however, experienced difficulties in attracting and maintaining the number of staff that

they would like to have in managing the program. Several programs have been affected by state-imposed

hiring freezes. Many states that have been able to hire have had difficulties offering salaries that are

competitive with the private sector.

As is the case with the CWSRF program, states have concerns about having sufficient funds to manage

the program. States may use up to four percent of their grant to pay for administration of the program.

While, in the absence of additional funds from the state, many programs have elected to impose fees on

borrowers, it may lessen the affordability of assistance for certain borrowers.

As reported in DWNIMS, 32 states have imposed fees on borrowers (Appendix B-12). Fees can be

applied in one of two ways—they can be paid directly by the borrower (i.e., on top of the loan) or they

can be included as principal within the loan. Table 4-3 shows the income that has been generated from

fees and their uses through SFY 2001. States may use income derived from either type of fee to help

administer the DWSRF program or for other activities eligible under the Fund or set-asides. Income

derived from fees placed on top of the loan can also be used to provide match required under the

program. There are additional limitations placed on fees included within loan principal; the most

important of which is that fees cannot be charged to disadvantaged communities receiving principal

forgiveness. While most states are using fee income to help administer their programs on an ongoing

basis, many are choosing to accumulate fees to

ensure that they will have funds available to

administer their programs in the event that federal

capitalization grants cease.

States have also provided additional state

contributions to help implement their programs.

Through SFY 2001, more than $1 million in

additional state contributions have been expended

to supplement funds made available from the

DWSRF administrative set-aside and fee income.

Figure 4-1 shows the annual expenditures on

administration and the sources of the funds.

Table 4-3 Sources and Uses of Fees (in millions)

Total Fee Income $20.98

Included in Loans $12.14

On top of Loans $7.94

Interest Earnings on Fee Account $0.90

Total Expenses from Fees $8.12

To Administer Fund $8.01

State Match $0.00

Other Eligible Purposes $0.11

Balance of Fee Income $12.86
Chapter 4 — Features of State Programs

21

▼ State Matching Funds

As a condition of the grant, states are required to

provide matching funds equal to 20 percent of the EPA

grant for deposit into the Fund. States may obtain

match from one or more of several sources (Figure 4-2).

The most common means of obtaining match is from

state appropriations. Bond proceeds are the second

most prevalent source of match. Bonds issued to obtain

match can be in the form of general obligation bonds or

revenue bonds. General obligation bonds are typically

issued by the state and are repaid using general revenue

from the state. Revenue bonds are typically issued by

the state DWSRF program and are repaid using interest

earnings from the Fund. It is important to note that

the use of DWSRF-backed bonds reduces the growth of

the Fund since interest earnings go to repay

bondholders rather than to provide

additional loans. Finally, although it has

not been done to date, states with

preexisting state-funded loan programs may

pledge repayments associated with loans

made under those programs provided that

the repayments are deposited into the

Fund.

States must demonstrate that they have

matching funds at the time of the grant. They have the option of depositing match into the Fund at any

time, but no later than when federal funds are drawn to pay incurred costs. Match deposited into the

Fund prior to its use can earn interest, which must be used for Fund purposes. States may also elect to

establish a Letter of Credit (LOC) within the state and withdraw funds only when they are needed for

disbursement to a recipient. Use of a LOC method allows the state to maintain its funds in the state

treasury until needed—interest earnings on funds held within the state’s treasury are not deposited into

the Fund. When funds are needed for disbursement, state and federal funds are drawn proportionally to

ensure that federal funds are not used more rapidly than state funds. An exception to this is in the case

of set-asides, for which states draw 100 percent federal funds.

Although it was a greater problem early in the program, several states have had trouble obtaining match.

In some cases, matching funds are tied to a larger state bond issue which must receive voter approval. In

other cases, state legislatures have been slow to provide matching funds through appropriations.

▼ Direct Loans vs. Leveraging

The majority of states have established direct loan programs whereby loans are made to recipients using

available federal funds, state match, interest earnings, and repayments. In some states, the demand for

$0

$5

$10

$15

$20

$25

$30

SFY

1997

Dollars (in millions)

SFY

1998

SFY

1999

SFY

2000

SFY

2001

Additional State Funds

Fee Income

DWSRF Set-Aside

38

9

12

2

Cash or Appropriation

Bonds retired outside DWSRF Fund

Bonds retired from DWSRF Fund

Other Sources

Note: Numbers add up to more than 51

because some states use more than

one method

Figure 4-1 Sources of Annual

Administrative Expenses

Figure 4-2 Sources of State Match (# of States)
DWSRF Report to Congress

22

financial assistance exceeds the availability of funding. Several states have decided that the immediate

demand for funding is so great that the program should increase the amount of funding available

through the issuance of bonds. Through SFY 2001, 15 states had used leveraging in their programs

(Table 4-4).

The decision to leverage using bonds must be well thought out. Demand must be sufficient to ensure

that the funds are used within the timeframes outlined by the Internal Revenue Service. Generally,

subsidized bond proceeds are used for public entities. States that wish to fund private systems must

exercise caution to ensure that subsidized bonds do not lose their tax-exempt status. The financial

strength of the recipients is also of a greater concern in a leveraged program since a strong loan portfolio

promotes a good bond rating, which translates to a lower interest rate. Interest rates charged in leveraged

programs tend to be slightly higher than those in direct loan programs because the interest rates reflect

the increased costs of funds as a result of issuing bonds. Some states that issue bonds offer loans made

from bond proceeds to borrowers with greater financial strength and offer direct loans to smaller, less

creditworthy, and/or private recipients.

Some states with leveraged programs have also made use of the practice of cross-collateralization, whereby

the funds from one SRF program can be used to secure the other SRF from revenue shortfalls (i.e.,

defaults) (Table 4-4). Generally, state bond issues can be used to support the other SRF program with

the condition that revenues from the bonds be allocated to the respective funds in the same portion as

they were used for security for the bonds. Use of the provision, provided for by Congress in the 1999

Appropriations Act, has had a significant

positive impact on state SRF programs,

particularly state DWSRF programs. Rating

agencies have given states with crosscollateralized programs better credit ratings,

which translate into lower bond interest

rates. Some DWSRF programs have

indicated that, without the flexibility

afforded by cross-collateralization, they

would be less able to implement a leveraged

program to reach drinking water borrowers.

An alternative to cross-collateralization which

also provides additional security and can

positively impact bond interest rates is shortterm cross-investment, which is allowed

under the investment provisions of both SRF

programs (Table 4-4). Using crossinvestment, a state may use available funds

from one SRF program to help cure a bond

default in the other SRF program by

“investing” funds in the other SRF program

temporarily to cover the deficiency. Funds

Table 4-4 States Using Leveraging

States Cross-Collateralization Cross-Investment

Alabama

Arizona X

Colorado X

Connecticut X

Indiana

Iowa X

Kansas

Maine X

Massachusetts X

Michigan X

Minnesota X

Missouri X

New Jersey X

New York X

North Dakota X
Chapter 4 — Features of State Programs

23

are repaid to the lending SRF once the borrower SRF has recovered from the default. The likelihood of a

state having to exercise cross-collateralization or cross-investment to cover a default is viewed as slim

because most states typically have several other levels of security that would be exhausted first.

▼ Coordination of Funding Programs

The DWSRF program is not the first program in any state to finance drinking water needs. The RUS

has been funding drinking water projects for small, rural communities for many years and the U.S.

Department of Housing and Urban Development has a Community Development Block Grant program

which has funded water infrastructure. Additionally, many states had preexisting grant and loan

programs or have instituted programs complementary to the DWSRF to provide assistance to public

water systems.

While competition can be effective at helping a potential recipient get an affordable financing package, it

can create problems when programs have worked with a system to prepare it for funding only to lose it at

the last moment to another funding program. Many states have determined that it is more practical to

develop coordination committees that work together to identify the best funding solution for a project.

These committees meet together periodically to discuss projects and develop funding packages. Some

states hold funding fairs at which potential

customers can learn about the various funding

programs and submit preapplications for

assistance. In Maine, the Department of

Health Services (the DWSRF lead agency) holds

regular meetings with the Maine Municipal

Bond Bank (the financial partner in

implementing the DWSRF), the state RUS

affiliate, the Department of Economic and

Community Development, and the CWSRF

Program (within the Department of

Environmental Protection) to streamline the

financial assistance efforts of all the agencies.

The status of each agency’s assistance capabilities

and the projects each intends to fund are

discussed at these meetings. Other issues

discussed include the projects for which funds

are not immediately available, the overall state

funding needs for drinking water and clean

water projects, and the ability and need for cofunding of projects.

The City of El Paso Public Service Board (PSB)

received a $15.3 million DWSRF loan to expand

the Jonathan Rogers Water Treatment Plant. The

DWSRF loan will be used to finance 32.5% of

design capacity to serve city residents. The

remainder of the design capacity will be financed

through a $14.9 million grant from the North

American Development Bank (NADBank) and

local funds. In addition to the DWSRF loan and

the NADBank grant, the El Paso Water Utilities will

contribute $4.5 million toward the water project.

The El Paso PSB proposes to expand the Jonathan

Rogers Water Treatment Plant from 40 to 60

million gallons per day and construct 32,000 linear

feet of 42-inch diameter water transmission main.

The water plant expansion will allow provision of

water to Colonia Areas within El Paso County, in

addition to conserving ground water resources and

improving regional water supplies.

Coordinating Funding in Texas

Texas
DWSRF Report to Congress

24

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Chapter 5 — Financial Status

25

5 Financial Status

This chapter provides a detailed breakdown of the financial status of the DWSRF program at the

national level. Subsequent chapters review the types of assistance and the types of systems and projects

that have received assistance. In order to effectively inform the public about how funds are being

distributed among projects and set-asides, EPA has requested that states provide a table describing the

sources and uses of DWSRF funds within their IUPs. This chapter follows that format.

▼ Sources of Funds

Through SFY 2001, the primary contributors to funds available for projects have been federal

capitalization grants and state match, although in some states, significant additional funds have been

made available through leveraging (Appendix B-1).

X Capitalization grants

Through SFY 2001, Congress had appropriated $4.418 billion for the DWSRF program. After

accounting for national set-asides (Table 5-1) and funds reserved for the District of Columbia and

Territories, $4.212 billion was available to states for capitalization grants. States have received $3.648

billion, or 87 percent of the funds available for grant awards. Grants for FFY 2000 funds had not yet

been made to 8 states and 33 states had not yet been awarded FFY 2001 funds*.

X State match and additional state contributions

As noted earlier, states are required to provide a 20 percent match on their capitalization grants. States

are required to demonstrate that they will be able to provide match, but are not required to deposit the

funds into the Fund until they draw federal funds. Through SFY 2001, states had deposited $773.4

million for state match (Appendix B-2). This reflects an overall 21 percent of the grants as some states

provide more match than required.

FFY 1997 FFY 1998 FFY 1999 FFY 2000 FFY 2001 TOTAL

Appropriation $1,275,000,000 $725,000,000 $775,000,000 $820,000,000 $823,185,000 $4,418,185,000

National Set-Asides $19,125,000 $12,875,000 $28,625,000 $44,300,000 $44,277,300 $149,202,300

Grants to DC and Territories $16,703,200 $9,471,300 $9,926,800 $10,316,800 $10,359,500 $56,777,600

Available Grants to States $1,239,171,800 $702,653,700 $736,448,200 $765,383,200 $768,548,200 $4,212,205,100

Awarded Grants to States $1,239,171,800 $702,653,700 $736,448,200 $765,383,200 $485,708,700 $3,929,365,600

Table 5-1 Capitalization Grants (through FFY 2001)

*Through September 30, 2001, the capitalization grants awarded totaled $3.929 billion.
DWSRF Report to Congress

26

Matching funds have been provided from several

sources (Table 5-2). In some states, match has been

obtained using more than one of the sources. Thirtyeight states have obtained match through state

appropriations. Twelve states have derived match from

bonds totaling $111.2 million that are retired using

the interest payments from loans and interest earnings

on investments of the Fund. Nine states have obtained

state match from bonds that are retired using funds

that are not from the DWSRF program and two states

have obtained match from other sources.

Table 5-2 Sources of State Match (in millions)

Source of Match

Cash or Appropriation $546.4

Bonds retired outside Fund $113.7

Bonds retired using Fund $111.2

Preexisting Loans $0.0

Other Sources $2.2

Total Match $773.4

Several states have been able to get additional state contributions to assist their programs. For example,

at the beginning of the program, the state legislatures in Kansas and New York appropriated $5 million

and $66 million, respectively, to help meet a high demand in the early years of the program. States have

the option of depositing these funds into the Fund and using them as credit for future match or they

may choose to maintain accounts separate from the Fund. Because of use and reporting requirements

attached to monies deposited into the Fund, many states have elected to keep additional state

contributions outside of the Fund to maintain flexibility in their use.

X Bond proceeds made available by leveraging

States may use the assets of the Fund as a source of revenue or security for the payment of principal and

interest on revenue or general obligation bonds issued by the state in order to increase the amount of

funds available for assistance. The net proceeds of the sale of bonds must be deposited into the Fund.

Through SFY 2001, 15 states had issued bonds in their programs (Table 5-3). The gross proceeds for

bonds issued in the national program were $1.520 billion. After considering the cost for issuing bonds,

the net bond proceeds were $1.485 billion. States must deposit funds in debt service reserves to provide

security on the bonds. While these funds are not immediately available for projects, they are released

back to the Fund as the bonds are repaid. Through SFY 2001, $434.3 million was being held in debt

service reserves. As bonds are repaid, the total amount of bonds outstanding in the program decreases.

The amount of bonds outstanding in the program is $1.473 billion.

X Interest earnings

While states may not hold monies with the sole purpose of earning interest, a state may earn interest on

monies deposited into the Fund prior to disbursement of assistance. This includes funds held in reserve

accounts that are used as security for bonds or guarantees. Through SFY 2001, states had earned $130.5

million in interest on Fund accounts.

X Transfers from the CWSRF

The SDWA gave states the flexibility to transfer an amount equal to 33 percent of their DWSRF grant to

the CWSRF program, or an equivalent amount from the CWSRF to the DWSRF program for deposit

into the Fund. The provision in the law included a sunset date of September 30, 2001, after which

transfers would not be allowed. As part of the FFY 2002 Appropriations Act, Congress extended the

provision for one additional year and the President’s FY 2003 Budget proposal extended for another year.

Through SFY 2001, eight states had made use of the transfer provision (Table 5-4). These states
Chapter 5 — Financial Status

27

transferred a total of $147.2 million from

their CWSRF programs to their DWSRF

Funds. The amount transferred ranged

from $5.4 million in Illinois to $66.2

million in New York. Most states have

elected to transfer repayments because the

transfer process is more expeditious. Only

$12.1 million of the transfers to date have

been federal dollars.

X Loan repayments

Most projects take from two to three years

to complete, and repayments must begin no

later than one year after completion of the

project. Therefore, it takes some time

before loan repayments begin flowing back

to the Fund. Many of the repayments to

date are likely from loans that were made to

Table 5-3 Bond Proceeds Through Leveraging (in millions)

Bond Proceeds

Gross Bond Net Bond Debt Service Available for Bond Principal Bonds

State Proceeds Proceeds Reserve Projects Repaid Outstanding

Alabama $68.4 $62.0 $14.3 $47.7 $1.4 $67.0

Arizona $8.0 $7.9 $2.5 $5.4 $0.2 $7.8

Colorado $122.3 $121.3 $35.3 $86.0 $4.7 $117.6

Connecticut $29.6 $29.6 $16.3 $13.3 $0.0 $29.6

Indiana $73.7 $70.0 $0.0 $70.0 $0.3 $73.4

Iowa $25.3 $24.5 $13.9 $10.6 $0.0 $25.3

Kansas $127.0 $123.9 $54.2 $69.7 $1.9 $125.0

Maine $4.8 $4.7 $0.02 $4.7 $0.4 $4.4

Massachusetts $160.9 $160.9 $62.6 $98.3 $3.2 $157.7

Michigan $153.3 $151.1 $70.2 $80.9 $0.0 $153.3

Minnesota $21.5 $21.1 $1.8 $19.3 $0.9 $20.6

Missouri $69.0 $68.2 $12.2 $56.0 $1.4 $67.6

New Jersey $63.4 $59.7 $1.9 $57.8 $0.7 $62.7

New York $580.5 $568.1 $148.7 $419.4 $30.8 $549.7

North Dakota $11.9 $11.8 $0.4 $11.4 $0.7 $11.2

Total $1,519.6 $1,484.8 $434.3 $1,050.5 $46.6 $1,472.9

State Dollars Transferred Transfers as a %

(in millions) of DWSRF Grants

Alabama $12.9 27%

Colorado $8.0 14%

Illinois $5.4 4%

Maryland $10.6 28%

Montana $8.8 20%

New Jersey $20.9 25%

New York $66.2 27%

Wisconsin $14.3 20%

Total $147.1 20%

*All transfers from CWSRF to DWSRF

Table 5-4 States Using Transfers*
DWSRF Report to Congress

28

refinance debt since they are not subject to a construction period. Through SFY 2001, the loan

principal repayments were $103.7 million and interest earnings on loans were $111.9 million, for a total

of $215.6 million in principal and interest.

▼ Uses of Funds

The uses of DWSRF funds are limited to activities that are eligible under the Fund and activities eligible

under the set-asides. This section identifies both the intended use of funds and the actual use

(obligation or expenditure) as of June 30, 2001.

X Set-asides

States are allowed to reserve up to 31 percent of their capitalization grants for set-aside activities. These

funds are not deposited in the Fund, but are held and tracked in separate accounts. States have reserved

$575.7 million of their capitalization grants for set-aside activities (Appendix B-19). Nationally, this

represents 15.8 percent of grants awarded, although the amount reserved at the state level varies from 6.7

percent to 31 percent. Through SFY 2001, states had expended $244.6 million for set-aside activities

(Appendix B-20). This represents 42.5 percent of the funds that have been reserved. While the amount

appears to be low, in many cases this is a result of the ability of states to develop multi-year workplans in

which they account for how funds will be expended. In some states, however, the progress of set-aside

expenditure has been impacted by problems experienced in getting the programs established. Additional

information on the use of set-asides can be found in Chapters 9 and 10.

X Fund assistance

States are required to make binding commitments within one year of taking a payment from the federal

Treasury (which gives states the authority to draw funds based on incurred costs). Through SFY 2001,

states had entered into binding commitments totaling $4.040 billion. However, a more useful figure is

the amount of loans that have been executed, as that represents when funds are available to assist

recipients. In most states, the execution of a loan agreement is equivalent to a binding commitment.

Through SFY 2001, states had entered into $3.764 billion in loan agreements (Appendix B-7).

Additional details on the types of assistance are provided in Chapter 6. States disbursed $2.195 billion

of the total loans made to recipients to cover incurred costs.

X Repayment of state match and leveraged bonds

States use the Fund to repay bonds issued for state match or bonds issued to fund additional projects.

States may only use interest earnings of the Fund and the interest portion of repayments to retire state

match bonds. Both the principal and interest portions of repayments and interest earnings of the Fund

may be used to retire leveraged bonds. Through SFY 2001, states had repaid $1.5 million in state

match bonds, $46.6 million in leveraged bonds, and $120.5 million for interest on bonds.
Chapter 5 — Financial Status

29

▼ Funds Available for Assistance

Table 5-5 provides a summary of the data

discussed in this chapter. As of June 30,

2001, the total sources of funds for the

DWSRF program were $6.399 billion. The

sources include capitalization grants awarded,

state match, transfers from the CWSRF, net

bond proceeds, interest earnings on

investments and loans, and loan principal

repayments.

The total uses of funds in the program were

$5.219 billion. They included current

binding commitments (i.e., loans that have

not yet closed), executed loan agreements,

repayments for leveraged and match bond

principal and interest, debt service reserves,

and amounts reserved for set-asides.

The funds made available for projects include

all sources less funds reserved for set-asides,

debt service reserves, and interest and

principal repaid on bonds. Through SFY

2001, the total funds made available for

projects were $5.221 billion (Appendix B-3).

The total funds that were uncommitted and

available for projects was $1.181 billion, or

23 percent of the funds made available for

projects. In their annual IUPs, states must

demonstrate that all funds will be committed

to projects identified on their priority lists.

Sources

Capitalization Grants $3,648.4

State Match $773.4

Transfers $147.2

Net Bond Proceeds $1,484.7

Investment Interest Earnings $130.5

Loan Principal Repayments $103.7

Interest Earnings on Loans $111.9

Total Sources $6,399.8

Uses

Binding Commitments $276.0

Loan Agreements $3,764.3

Bond Principal Repaid $48.1

Debt Service Reserve $434.4

Interest Paid on Match and Leveraged Bonds $120.5

Amounts Reserved for Set-Asides $575.8

Total Uses $5,219.1

Funds Made Available for Projects $5,221.0

Funds Uncommited (for Projects) $1,180.7

Sources - Uses (or funds immediately available for projects or other uses)

Table 5-5 Summary of Sources and Uses (in millions)
DWSRF Report to Congress

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Chapter 6 — Types of Fund Assistance

31

6 Types of Fund Assistance

This chapter provides a discussion on the types of assistance that states have provided to water systems

from the Fund. It includes information on the conditions that recipients of assistance must meet, the

weighted average interest rates of the assistance states have provided, and the use of disadvantaged

assistance by states.

▼ Conditions for Receiving Assistance

As discussed earlier, DWSRF assistance may only be provided to eligible recipients for eligible projects.

In addition, there are other national conditions that recipients must meet in order to receive assistance.

States may also impose additional conditions on recipients.

Systems must be able to demonstrate that they have a dedicated source of revenue, or in the case of

privately-owned systems, adequate security to ensure repayment of assistance. Systems must also have

the technical, financial, and managerial capacity to ensure compliance with the SDWA. States have

developed different strategies for assessing the capacity of systems. A description of the methods used by

six states was included in the EPA report, Case Studies in DWSRF Implementation - Capacity Assessment,

EPA 816-R-00-004 (July 2000). The methods used by states will change over time as states implement

capacity development strategies required by the SDWA. If a system lacks adequate capacity, a state may

assist the system provided that it agrees to undertake changes to ensure that it will achieve technical,

financial, and managerial capacity.

Finally, a system cannot receive assistance if it is in significant noncompliance with any national primary

drinking water regulation or variance unless such assistance will address the cause of the noncompliance

and return the system to compliance. Assistance may also be provided for a project unrelated to the

cause of noncompliance if the system is on an enforcement schedule or has a plan for returning to

compliance.

▼ Types of Fund Assistance

Through SFY 2001, 1,776 assistance

agreements had been executed for a total of

$3.764 billion. Although the law provides

for other types of assistance, loans are the

predominant type of assistance provided

through state DWSRF programs (Table 6-1).

For some states, loans are made through the

purchase of a separate debt instrument that

the community must enter into as a

Number Dollars

of Agreements

Loans 1,670 $3.314 B

Short-term Refinance 24 $57.7 M

Long-term Refinance 82 $392.6 M

Guarantee/Insurance 0 $0

Total 1,776 $3.764 B

Table 6-1 Types of Fund Assistance
DWSRF Report to Congress

32

condition for receiving assistance. The second most common type of assistance is refinancing of existing

short- or long-term debt. Of the total agreements, 106 were for refinancing of short- or long-term debt

in the amount of $450.3 million, or 12 percent of the total assistance provided (Appendix B-10). While

states can also use funds to provide guarantees or purchase insurance, none had made use of these types

of assistance through SFY 2001. States can include costs that were incurred prior to execution of a loan

within the loan provided that the costs were authorized by the state. Ensuring that systems can be

reimbursed for these pre-approved costs is important to those states which have short construction

seasons (e.g., Alaska) or which conduct financing at specific times of the year (e.g., New Jersey).

The repayment period for loans cannot exceed 20 years (except for disadvantaged loans). Although some

states provide for shorter repayment periods, most loans have repayment terms of 20 years. Nondisadvantaged loans must have interest rates that are between zero and market rate. States are responsible

for identifying the market rate against which they will set their interest rate. In states that provide

assistance to privately-owned systems, states may have one market rate for public borrowers and another

(typically higher) for private borrowers. EPA has asked states to report their market rates in the

DWNIMS. Across all years of the program, market interest rates identified by states have ranged from

2.5 to 8 percent.

States use different methods for

determining their interest rates. Most

states set their interest rate based on

some percent of the rate that states are

charged for borrowing—typically the

20 year General Obligation Bond

Buyer Index. Figure 6-1 shows the

monthly 20 year Bond Buyer Index

tracked by the Federal Reserve. Some

states have established a set interest

rate which is charged to all borrowers

in the program while others have

floating rates that are based on

0

1

2

3

4

5

6

7

8

9

10

Aug-96

Feb-97

Aug-97

Feb-98

Aug-98

Feb-99

Aug-99

Feb-00

Aug-00

Feb-01

Aug-01

Interest rate (%)

Municipal Corporate Aaa Corporate Baa

Figure 6-1 Monthly Bond Buyer Index

0

5

10

15

20

25

30

35

40

45

0 to 2% 2 to 4% > 4%

Interest Rate

Number of States

SFY 1997

SFY 1998

SFY 1999

SFY 2000

SFY 2001

Figure 6-2 Annual DWSRF Weighted Average Interest Rates
Chapter 6 — Types of Fund Assistance

33

economic need, loan repayment period, or some

other factor. States are asked to provide a weighted

average interest rate on all loans executed in each

state fiscal year. Weighted interest rates have

ranged from 0 to 6 percent for all years (Figure 6-

2) with most programs charging interest rates that

range from 2 to 4 percent (Appendix B-11). Rates

have decreased slowly over the past three years.

When compared to the 20 year Bond Buyer Index,

the program has provided subsidies equivalent to

11 to 26 percent grants.

The law allows states to refinance debt that was

issued after July 1, 1993, for publicly-owned

systems only. Most states regard refinancing as a

low priority, although in some cases the savings

afforded through refinancing debt can be

significant, particularly for systems that have issues

related to affordability. Generally, however,

refinancing was more common early in the

program.

▼ Disadvantaged Assistance

States are allowed to provide additional subsidies to

systems identified as serving disadvantaged

communities. Subsidies that are in the form of

negative interest rate loans or principal forgiveness are limited to an amount equal to 30 percent of the

state’s capitalization grants. States can also extend loan terms to up to 30 years for disadvantaged

communities.

States are responsible for defining which systems are disadvantaged using affordability criteria which they

must release for public comment. In accordance with the law, EPA released a report in February 1998

on how states could consider affordability in their state programs—Information for States on Developing

Affordability Criteria for Drinking Water (EPA 816-R-98-002). EPA also released a report in July 2000

on disadvantaged programs developed by several states, Case Studies in DWSRF Implementation -

Disadvantaged Communities (EPA 816-R-00-005).

Not all states have developed disadvantaged assistance programs, and for those that have, not all

programs offer principal forgiveness. EPA has decided that if a state makes an assessment of the

disadvantaged status of a community in determining the terms of assistance, then the state is deemed to

have a disadvantaged program. Using this definition, the DWNIMS shows that 29 states have developed

disadvantaged assistance programs (Figure 6-3). Of the 29 states with programs, 16 states provided

principal forgiveness and 18 states provided loan terms of up to 30 years. Ten states provided both

principal forgiveness and 30 year terms. Five states had disadvantaged programs, but provided neither

The City of Ashland, located in northern

Wisconsin on the south shore of Lake Superior, is

home to more than 8,600 residents. Historically,

Ashland was a shipping port for nearby iron ore

mines. Its 100 year old surface water slow sand

filtration system, drawing from Lake Superior, was

unable to consistently produce finished water of

acceptable quality under current turbidity

standards. The city received a $2.3 million

DWSRF loan to build a 2 million gallon per day

membrane microfiltration plant and replace the old

filters. Ashland also qualified for a disadvantaged

interest rate of 1.782% because its population was

less than 10,000 residents and the adjusted

median household income (MHI) was less than

80% of Wisconsin’s adjusted MHI. The project

also addressed other treatment violations with the

installation of new chemical feed systems to

improve the uniformity of the added chemical

concentrations and purchasing a new supervisory

control and data acquisition system to provide

continuous system monitoring and control from

multiple city locations.

Wisconsin

Providing Disadvantaged Assistance

in Wisconsin
DWSRF Report to Congress

34

principal forgiveness or 30 year

terms. These states offer lower

interest rates to recipients identified

as disadvantaged. Table 6-2 shows

the breakdown of disadvantaged

assistance.

For the purposes of determining

compliance with the limitation that

no more than 30 percent of funds be

used to provide disadvantaged

subsidies, states only consider the amount of principal that is forgiven from assistance agreements.

Nationally, an amount equal to 2.6 percent of the capitalization grants have been used for principal

forgiveness. When looking only at those states that have offered disadvantaged assistance that included

principal forgiveness, an amount equal to 5.7 percent of their capitalization grants were used to forgive

principal on loans. No state has used the full 30 percent allowed by the law, although three states have

used between 15 and 20 percent (Appendix B-15).

Table 6-2 Disadvantaged Assistance (D.A.)

Number Dollars

of Agreements

Total D.A. 455 $618.9 M

D.A. including principal forgiveness 187 $213.7 M

D.A. with >20 year terms 185 $218.4 M

* Some recipients receive both principal forgiveness and extended

terms

Disadvantaged Assistance represented

26% of agreements and 16% of total assistance

Provided D.A.

Provided D.A. with

Principal Forgiveness

Figure 6-3 Disadvantaged Assistance (D.A.)
Chapter 7 — Recipients and Projects Receiving Assistance

35

Recipients and Projects 7 Receiving Assistance

The types of systems receiving assistance and the types of projects being funded are as varied as the

universe of public water systems itself. The DWNIMS collects information that captures the diversity of

assistance being provided through the state programs. EPA has collected state aggregate data—not data

on individual projects. However, in this chapter, and throughout this report, examples are provided of

the types of problems that are being addressed by specific projects and the benefits afforded by these

projects.

▼ Types of Systems

State DWSRF programs can provide

infrastructure assistance to publicly- and

privately-owned community water systems

and non-profit noncommunity water systems.

Although there are a greater number of

noncommunity water systems, the vast

majority of assistance has been provided to

community water systems, which serve a much

greater population (Figure 7-1).

The universe of drinking water systems differs significantly from that

of wastewater – where almost all treatment works are publiclyowned. For drinking water, about 43 percent of community water

systems are publicly-owned and are usually under the authority of

local government (Figure 7-2). The remaining community water

systems reflect different types of private ownership. Thirty-three

percent are systems where the primary business purpose is water

supply, such as investor-owned utilities and systems held by

homeowner’s associations. The remaining 24

percent of privately-owned systems are considered

ancillary water systems - where the primary

purpose of the business is not water supply. Most

of the ancillary community water systems are

mobile home parks. However, ownership profiles

look different when the population served by the

system is considered (Figure 7-3). Almost 90

percent of the systems serving 10,000 or more

people are under public ownership. As the

CWS

98.6%

NCWS

1.4%

Public

43%

Private

33%

Ancillary Private

24%

0%

20%

40%

60%

80%

100%

<100 101-500

% Public % Private % Ancillary

501-

3,300

3,300-

10,000

>10,000

Figure 7-1 Assistance to CWS and NCWS (% Loans)

Figure 7-2 CWS Ownership

Figure 7-3 CWS Ownership by Size
DWSRF Report to Congress

36

population served by a system decreases, the percentage of

water systems under private ownership increases. Because

there is such diversity of ownership in the drinking water

industry, a one-size fits all approach is not always

appropriate in identifying challenges and potential

solutions to those challenges.

Although the law gives states the authority to provide

assistance to private systems, not all states have done so

(Figure 7-4). Several states have state legislative or

regulatory restrictions on providing assistance to private

systems. A few others have made a policy decision to

restrict assistance to private systems due to concerns about

endangering the tax-exempt status of bonds issued to

provide state match. Among the states that do not have

these restrictions, some have yet to provide assistance to a

privately-owned system. These states have indicated that

they have not had any demand from privately-owned

systems for assistance or that they have been reluctant to

provide assistance to these systems due to concerns about

the creditworthiness of applicants. Publicly-owned

States that Provided DWSRF

Assistance to Private Systems

States Restricting DWSRF

Assistance to Private Systems

States that Have Not Yet Provided

DWSRF Assistance to Private Systems

Assistance to private systems

represented of agreements,

of total assistance dollars

9%

4%

Figure 7-4 Assistance to Privately-owned Systems

Tradewinds Utilities is a small private water

system in central Florida. In October 1998,

the Department of Health (DOH) asked the

system to sponsor a project in an area with

multi-family housing units regulated by DOH

and served by water with extensive

microbiological contamination. Tradewinds

received a $590,000 low interest loan to

construct an elevated storage tank and

approximately 6,185 feet of water lines to the

area. This was Florida’s first loan to a private,

investor-owned utility. Florida requires all

systems receiving DWSRF assistance to

maintain a repayment reserve fund in case they

encounter difficulties in making loan

payments. Because Tradewinds is a private

system, it was required to establish a repayment

reserve that was 6 percent more than that

required of publicly-owned systems.

Construction was completed in November

1999.

Funding Private

Systems in Florida

Florida
Chapter 7 — Recipients and Projects Receiving Assistance

37

systems generally have the full faith and credit of the utility or

community backing its loan. States funding private systems may

have to put in additional effort to ensure a similar level of security

for these loans.

The assistance provided to private systems does not reflect the

inventory data for those systems. While 57 percent of the nation’s

community water systems are privately-owned, only nine percent

of DWSRF assistance agreements have been provided to privatelyowned systems (Appendix B-14). The states that have been

successful in funding private systems (see box) use a variety of

methods for assessing credit—some contract the service out and others do it in-house. EPA continues to

be concerned about the failure of many states to fund privately-owned systems and will continue to work

to raise the comfort level of states in providing assistance to privately-owned systems and address issues

that are causing states to restrict funding to these systems.

Public water systems operated on American Indian lands and in Alaska Native Villages can receive direct

grants from EPA through the national set-aside reserved for that use. However, these systems are also

eligible for assistance from state DWSRF programs, with the exception that a specific project cannot

receive both a DWSRF loan and a Tribal set-aside grant. There are many challenges involved in

providing assistance to Tribal systems associated with their legal status. However, a few states have

worked to implement procedures to facilitate the funding of these systems, which often have serious

public health needs. Arizona was the first state to provide a DWSRF loan to a Tribal government for its

water system.

▼ Size of Systems

Eighty-one percent of the population is

served by the seven percent of total

community water systems that serve more

than 10,000 people. However, the

majority of water systems serve fewer than

3,300 people (Figure 7-5). Systems that

serve small populations face challenges in

responding to infrastructure needs and

regulatory requirements, because they lack

the economies of scale that are available to

large water systems, which can spread

costs over a larger population base.

However, where there are challenges, there

are also opportunities to introduce

practices that can bring efficiencies to the drinking water industry and/or reduce the number of these

small systems. For example, consolidating management or the physical assets of a water system with

another system can reduce burdens on the utilities and customers by leveraging the systems’ economies

of scale. Consolidation could be especially attractive for small systems that are in close proximity to

another system.

Figure 7-5 Population Served as a Function of System Size

States with Greatest

Number of Loans to Private

Systems (shown as a

percent of all loans)

Arizona - 54%

Washington - 30%

Florida - 30%

Pennsylvania - 28%

Vermont - 23%

59%

26%

8% 6%

2% 1%

8% 10%

37%

44%

0%

10%

20%

30%

40%

50%

60%

70%

<500 501-3,300 3,301-

10,000

10,001-

100,000

>100,001

% of Systems % of Population

Population

Percent
DWSRF Report to Congress

38

The SDWA placed a special emphasis on

providing assistance to small systems

serving 10,000 people or fewer. States

must provide a minimum of 15 percent

of their available funding to small

systems. States have more than met the

requirement, with 41 percent of the

funds that have been provided nationally

through loans going to small systems.

The actual percentage of loan agreements

(75%) provided to small systems is

considerably larger. This is due to the

fact that the average dollar amount of

loans to small systems is smaller than

that for larger systems. While several

states have not met the requirement for

funding small systems, this is primarily

because they have not executed many

loans.

While the law established a population

size of 10,000 or fewer as small for the

purposes of the DWSRF program, many

in the drinking water industry do not

consider a system that serves 10,000 to

be a small system. In

fact, the majority of

public water systems

serve populations of less

than 500. When

breaking out assistance

across a greater number

of population ranges,

one can see that the

greatest number of

agreements have been

made in the 501-3,300

population range

(Figure 7-6, Appendix

B-16). The percentage

of assistance provided to

the various size

categories of systems

Figure 7-6 DWSRF Assistance by System Size

Figure 7-7 Comparison of Needs to Assistance by System Size

Funding a Small Water System in North Dakota

The Southeast Water Users District received DWSRF assistance to provide water service

to the City of Havana, North Dakota. Havana has a population of 124 and a land area

of 0.6 square miles. The $60,000 loan was used to construct transmission and

distribution lines necessary to rectify Havana’s pressure problems and bacteriological

compliance problems under the Total Coliform Rule.

Funding a Large Water System in Wisconsin

The City of Oshkosh, located in central Wisconsin on Lake Winnebago, had a 100-

year-old surface water system that was vulnerable to microbial contaminants. To address

this threat, a new 16 million gallon per day treatment plant was planned, designed, and

built with DWSRF loans totaling $25.6 million. This new plant, which has four dualmedia filters, two ozone contractors, chemical handling facilities, and plant

administration space, ensures safe water for the city’s 55,000 residents. The entire cost

of the project was $29 million, and Oshkosh was scheduled to receive its final DWSRF

loan of $3.5 million to complete the project.

North Dakota Wisconsin

3%

19% 19%

40%

20%

18%

37%

21% 20%

5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

<501 501-3,300 3,301-

10,000

10,001-

100,000

>100,001

% of Dollars % of Loans

Population

Percent

22%

13%

65%

22% 19%

59%

0%

10%

20%

30%

40%

50%

60%

70%

80%

<3,300 3301-10000 >10,000

Population

Percent

% Needs % DWSRF Assistance Dollars
Chapter 7 — Recipients and Projects Receiving Assistance

39

largely agrees with national needs numbers identified

by the 1999 Drinking Water Infrastructure Needs

Survey (Figure 7-7).

States have faced challenges in providing assistance to

small systems. These systems tend to be less

sophisticated than many larger systems and often have

issues related to technical, financial, and managerial

capacity. Some very small systems may not even be

aware of the infrastructure improvements needed to

ensure the continued supply of safe drinking water.

States have had to work hard to simplify and streamline

requirements to help small systems through the loan

application process. States are also entering into

partnerships with organizations that work with small

systems to help them identify projects and work

through the application process. States are using setaside funds to provide capacity development assistance

and are also working to introduce financial and

infrastructure assessment elements into sanitary surveys

of drinking water systems conducted by the states.

▼ Categories of Projects -

Infrastructure

The DWNIMS collects state aggregate data on several categories of projects, including the project

categories used in the 1999 Needs Survey. The Needs Survey collected information on four major

construction categories which correspond to the primary components of a drinking water system: source;

transmission and distribution; treatment; and storage. In addition to these construction categories, the

DWNIMS collects data on project costs associated with purchasing systems, restructuring a system, or

acquiring land needed to locate the facilities. Through SFY 2001, states reported that they had provided

funding to more than 1,846 projects. The number of projects is greater than the number of loan

agreements because some loans are made for more than one project.

The Needs Survey showed that the majority of needs are

associated with transmission and distribution assets

(Figure 7-8). This finding reflects that most of the

assets of a water system are associated with the

transmission pipes that move water from the source to

the treatment plant and the distribution pipes that move

treated water from the plant to the customers. Projects

under this category may include the installation or

replacement of pumps, valves, backflow prevention

devices, service lines, and water meters. In DWNIMS,

Treatment

25%

56%

Source Storage 6%

12%

Other

1%

Transmission &

Distribution

Figure 7-8 Needs by Category (% Dollars)

Chimney Rock Village, located in North Carolina’s

Rutherford County, is a community with a

population of only 137 people. Until 1998, it was

served by privately-owned Chimney Rock Water

Works. The Water Works had only an emergency

operator appointed by the North Carolina Utilities

Commission and was under an Administrative

Order to replace its spring source which was under

the direct influence of surface water with a new

source of supply and replace its undersized water

lines. In 1998, the Village purchased the water

system in order to be eligible for state assistance.

Due to the limited number of customers and

excessive water rates, funding for the needed

projects from rate increases was unfeasible. The

Village received a $182,230 DWSRF loan to

comply with the Administrative Order. The project

included developing and connecting previously

drilled wells to the system so that the spring water

sources could be abandoned. The Village was also

able to replace its undersized lines. The project was

successfully completed and brought the Village into

compliance.

Replacing Inadequate Distribution

Lines in North Carolina

North Carolina
DWSRF Report to Congress

40

EPA asked states to report whether an

agreement addressed one or more of the

construction categories and the dollar amount

associated with that component. The total

number of components identified is greater

than the number of agreements because most

projects typically address more than one

construction category. Fifty-one percent of the

total components identified addressed

transmission and distribution while 34 percent

addressed a treatment component.

Although transmission and distribution needs were the most frequently addressed construction category,

the picture changes when looking at funding directed at the projects (Appendix B-13). Treatment

projects comprised 43 percent ($1.612 billion) of the total construction costs while transmission and

distribution made up only 32 percent ($1.184 billion) of the total costs (Figure 7-9). The law requires

that states give priority to projects that are needed to protect public health and ensure compliance with

SDWA. Many projects that are needed to address these statutory criteria will require a treatment

solution as opposed to solutions provided through the other categories. Treatment projects can include

projects needed to address microbial contaminants,

which, if left unaddressed, can result in serious and,

in some cases, immediate health problems. Projects

addressing microbial contaminants might include

filtration of surface water sources and disinfection

with chlorine-based compounds. Removal of chronic

contaminants such as organic chemicals may require

aeration and/or treatment by granulated activated

carbon to reduce concentrations to safe levels.

Treatment can also address secondary contaminants

like iron and manganese, which can affect the taste

and color of water. The solutions to these violations

often pursue a treatment course, but may also involve

other categories of infrastructure.

Storage projects ($199.1 million) include those

needed to construct or rehabilitate elevated and

ground level storage for treated water. The category

also includes installation of covers for treated water

reservoirs to bring them into compliance with the

Interim Enhanced Surface Water Treatment Rule.

Water systems need to have sufficient storage to

provide an adequate supply of treated water to the

public during periods of variable demand. The

storage must enable the system to maintain minimum

pressures to ensure that contaminants are not

Treatment

43%

Transmission &

Distribution

32%

Source

10% Storage

5%

Misc.

3%

N/A

7%

Figure 7-9 DWSRF Assistance by Category (% Dollars)

Situated in Minnehaha County, the City of

Brandon is just a few miles from Sioux Falls,

South Dakota’s largest city. As Sioux Falls’

population grew by 25% over the past 10 years,

the City of Brandon grew even faster: from about

3,500 people to 5,700. Brandon’s four existing

wells had limited capacity and drew from a

shallow aquifer high in nitrates. To remedy the

nitrate problem and increase supply, the city

investigated drawing water from a deeper, cleaner

aquifer. Although water in the deeper aquifer is

low in nitrates, it has high levels of iron and

manganese. The city decided to drill a fifth well

in the deeper aquifer and blend this water with

the existing supply to reduce nitrate levels. The

city needed to build a new water treatment plant

to remove the iron and manganese. In 1998,

Brandon received a $1.95 million DWSRF loan

to drill the additional well and to construct a new

treatment plant using oxidation and filtration

technology. Construction was completed in

November 1999 and the new plant went online

in early 2000. The project came in $70,000

under budget.

South Dakota

Addressing Nitrates in South Dakota
Chapter 7 — Recipients and Projects Receiving Assistance

41

introduced into the distribution system. The optimal storage

capacity is generally based on the population served by the

system and requirements that a state may have to ensure that

systems have an adequate emergency supply in case of an

interruption of service.

Drinking water is obtained from ground water or surface water

sources. Projects needed to address surface water sources include

constructing or rehabilitating surface water intake structures.

Projects designed to address ground water sources include drilled

wells, wellhead pumps, and spring collectors. States provided

$355.3 million in funding for capital projects addressing sources

of drinking water. Projects intended to protect sources of

drinking water from contamination are not eligible for assistance

from the Fund, but can be addressed through various set-asides

as described in Chapters 9 and 10.

Information on several other miscellaneous project categories is

also collected. Planning and design is a necessary component of

any capital improvement project. States have funded planning

and design in many different ways. Most frequently, the costs of

planning and design

are rolled into

construction costs for

the infrastructure

improvements.

However, a few states

have made loans solely for the cost of planning and design.

States have provided $20.5 million in loans that are solely for

planning and design through the Fund. Planning and design

funding for small systems has also been provided through setasides in the form of loans or grants.

EPA is also tracking the costs for acquiring land that is needed

for the purposes of locating eligible project components. At

$12.2 million, the costs for land acquisition have not been

significant. This is likely due to the fact that most of the

construction that has taken place has been on land that is

already owned by the utility. Land that is needed to protect

sources of drinking water is not eligible for purchase using the

Fund. A separate set-aside allows water systems to take loans to

acquire land or conservation easements to protect their drinking

water source.

Prairieton is a community of 350

people in central Indiana. In 1999,

the Prairieton Water Company was

under an Administrative Order due to

nitrate maximum contaminant level

(MCL) violations. Given its small

population, the best available solution

for Prairieton was to hook up to the

Indiana American Water Company, a

much larger system. Indiana American

serves 700,000 people in 35 cities and

towns. A $500,000 DWSRF loan was

awarded in January 2001 to fund

Prairieton’s connection to Indiana

American. Because Prairieton has a

median household income of only

$11,973, it qualified for the lowest

available interest rate of 2.9%. This

loan allowed Prairieton to abandon its

existing plant and connect to Indiana

American with the residential water fee

remaining steady at $25 per month.

Residents began receiving water from

Indiana American in May 2001.

Funding Consolidation

in Indiana

Indiana

Michigan awarded three loans

totaling $17.4 million to the

community of Wixom. Located

about 35 miles outside of Detroit,

Wixom has a population of 6,700.

Before the DWSRF loans, Wixom

had eight separate water systems:

several small subdivisions, apartment

complexes, and regional business

developments had their own

(unreliable) water systems. The

DWSRF loans were used to extend

distribution mains, build elevated

storage tanks, provide a new pump

station, and loop and connect

systems so that all the systems could

betied into the Detroit Regional

Water System, which serves about

80 communities.

Funding Regionalization

in Michigan

Michigan
DWSRF Report to Congress

42

Some states are using their DWSRF programs to encourage efficiencies in the drinking water industry.

Consolidation, regionalization, and restructuring are three activities that can address the large numbers of

public water systems that serve very small populations throughout the country. To facilitate

consolidation of utilities, the costs needed to purchase a public water system are eligible for DWSRF

assistance. Costs needed for restructuring, which could include changes in the organizational or

management structure, accounting or rate systems, or other activities that would improve the technical,

financial, and managerial capacity of a water system, are also eligible for assistance. States have provided

$59.5 million and $24 million for the costs of purchasing systems and restructuring, respectively. States

have also executed 157 agreements for $458.7 million to facilitate consolidation projects which have

resulted in the elimination of 325 systems.

▼ Categories of Projects - Programmatic

EPA has also collected project data for several categories that reflect DWSRF programmatic priorities and

issues (Appendix B-14). The three priority criteria in the SDWA for the DWSRF program are

protection of public health, compliance with requirements of the Act, and ensuring affordability. Almost

all projects funded through the program will protect public health, by either addressing an immediate

threat, or by taking preventative measures to ensure that the public is protected. Likewise, all projects

ensure that the system will maintain compliance with the requirements of the Act. However, some

projects receive assistance to address an existing violation of health based drinking water standards. The

DWNIMS asks states to report on the number of loan agreements that are funding a project to help a

system come into compliance. More than one-third of the agreements were made to systems to address

existing compliance problems. Projects funded by these agreements will help to ensure safer drinking

water for the more than 10 million people in SFY 2000 and 7 million people in SFY 2001 served by the

systems.

Because all DWSRF loans are made at interest rates that are at or below the market interest rate, they can

provide relief to water system customers who would be subject to even greater rate increases to ensure

Figure 7-10 Type of Assistance

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Agreements Dollars

Non-disadvantaged

Disadvantaged (D.A.)

D.A. w/ Principal Forgiveness

D.A. w/ >20 year repayment term

A Note on Population Numbers

The DWNIMS collects numbers on the population

benefitting from assistance for several of the data elements.

It is important to note that these figures may include double

counting if a system receives more than one loan

agreement from a state over a period of years. For example,

if a city received a loan in 1998 to correct a compliance

problem and another loan in 2000 for a different project

addressing a different compliance problem, the population

for that city would be counted twice. Because states

cannot double count in the annual data collection, it is

sometimes better to look at annual rather than cumulative

numbers for population.
Chapter 7 — Recipients and Projects Receiving Assistance

43

repayment of debt incurred to fund

infrastructure improvements. As noted

above, however, a state may provide

additional subsidies to water systems it

has identified as serving disadvantaged

communities. Approximately 26 percent

of the total loan agreements have been

provided to these systems. Forty-one

percent of the disadvantaged assistance

agreements included forgiveness of

principal and 38 percent extended loan

terms beyond the standard 20 year term

(Figure 7-10).

There are more than 16 million

households that obtain their drinking

water from sources other than public

water systems. The vast majority of these

households receive water from drilled or

dug ground water wells. Although state or local governments have imposed requirements on these wells,

they are not regulated by the SDWA. There are instances where it may be desirable to extend service

from a public water

system to households

served by wells that have

become contaminated

and unsafe.

However, there are cases

where a public water

system is not located

near the homes served by

contaminated wells and

the SDWA requires that

DWSRF assistance be

provided only to public

water systems. States

asked EPA to consider

how these important

public health problems

could be addressed by

the DWSRF program.

EPA issued a policy in

December 2000 which

allowed states to provide

The Village of Unionville had a water supply that was antiquated

and portions of the system were in dire need of replacement.

Village officials had begun working with the U.S. Department of

Agriculture’s Rural Development (RD) Office to obtain financial

assistance for the project as early as 1991. When it became

apparent that the RD grant would be insufficient to meet total

project costs, the Village turned to the Environmental Facilities

Corporation and the DWSRF to make the project possible. The

DWSRF co-funded the project with the Village receiving

$823,370 in subsidies from the DWSRF. The Village also

received a $450,970 loan from the DWSRF combined with a

$475,760 grant from RD toward the total project cost of

$1,750,000. By bringing together both federal and state

resources, the Village could move forward. Through replacement

of old mains, and the installation of new pumps and a well, the

risk of microbiological contamination has been greatly reduced.

Providing Disadvantaged Assistance in New York

New York

Mount Pleasant, south of Nashville, a community with a population of 4,278, had

antiquated water lines that served 15 residential customers. These water lines had

galvanized pipes which allowed rust to leach into the water supply. The water system

also had high unaccounted-for water losses. Mount Pleasant received a one-time

$71,300 DWSRF loan to replace and extend its water lines. The interest rate on the

loan is 3%, which is based on the town’s small population and low average annual pretax household income. Once the water lines were extended, 15 additional customers

were added to the system who had previously drawn water from private, contaminated

wells.

Providing Safe Drinking Water to Households in Virginia

Coal mining in the Red Root Ridge area in Tazwell County led to serious water quality

and quantity problems. One family depended on a cistern to supply its water after two

wells failed. Even with a cistern, the family purchased drinking water and had

insufficient water for bathing and laundering. The local fire department often brought

them water, but the cost was high and they sometimes ran out of water. A $416,000

DWSRF loan was provided to Red Root Ridge for a waterline extension project. The

project was completed in May 2000 to provide safe water to 63 families, including the

family that depended on a cistern.

Tennessee

Extending System Service to Households in Tennessee

Virginia
DWSRF Report to Congress

44

assistance to an entity that was not currently a

public water system, if the assistance would

result in the creation of a federally-regulated

community water system. States have reported

funds that have been used to create new public

water systems. Through SFY 2001, 46 loan

agreements totaling $84.6 million had been

made that resulted in the creation of new

systems. These new public water systems are

subject to requirements to ensure that they have

adequate technical, financial, and managerial

capacity, and that they will not contribute to

unreasonable growth.

Finally, as noted earlier, many states have

funding programs that complement the DWSRF

program—federal funding is also available

through the RUS and Department of Housing

and Urban Development. Many states have

developed coordination groups to maximize use

of funding and to help develop the best funding

packages available for potential recipients. States

have been asked to report on the number and

amount of projects they fund using monies from

Provided DWSRF

Coordinated Funding Coordinated Funding

represented of agreements

in assistance ( were DWSRF funds)

15%

Note: Not all states reported data in DWNIMS. $680M $366M

Figure 7-11 Coordinated Funding

Maine

Coordinating Funding in Maine

Maine’s Winter Harbor is a disadvantaged community

with approximately 200 residential customers. With

the average annual water bill exceeding $300 and the

average annual household income just over $19,000,

the average family’s water bill is almost 2% of their

annual pre-tax income. The water system in Winter

Harbor was privately-owned and poorly managed. It

was one of the last unfiltered surface water systems in

Maine and had limited storage, old water mains, and

high unaccounted-for water. Funds from the Rural

Development Agency of the U.S. Department of

Agriculture paid for an eminent domain takeover and

the water system became a public water district. In

1997, Winter Harbor received a DWSRF loan of $1.1

million and a U.S. Housing and Urban Development

(HUD) Community Development Block Grant of

$400,000 to install two new wells, a new pump

station, treatment plant, glass line, and storage tank.

Winter Harbor was given maximum assistance with

75% of the funds on principal forgiveness and 25%

of the funds on a 0% interest loan over 30 years. In

1999, the community received another DWSRF loan

of $180,000 and a HUD Community Development

Block Grant of $400,000 to replace nearly half of the

water mains.
Chapter 7 — Recipients and Projects Receiving Assistance

45

more than one source (Appendix B-18). Although some states that have coordinated funding failed to

report their data, 27 states did report that they had funded projects using multiple funding sources

(Figure 7-11). In these states, 15 percent of the DWSRF agreements were coordinated. The total dollar

amount in these coordinated agreements was $679.7 million, of which $366.3 million (54%) was

DWSRF funding.
DWSRF Report to Congress

46

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Chapter 8 — Financial and Programmatic Effectiveness

47

Financial and Programmatic 8 Effectiveness

Nationally, the DWSRF program has been effective in providing financial assistance for needed drinking

water projects. When looking at effectiveness on a state by state basis, some states have been challenged

in implementing their programs due to various barriers, which will be discussed in a later chapter. The

activities conducted using the infrastructure Fund and the set-asides are integral components in the

greater mission of drinking water and public health protection. This chapter primarily deals with the

financial and programmatic effectiveness of the Fund and, as such, the measures that are discussed within

this chapter focus on the Fund as a separate entity. Many states are using the set-asides to directly

support the activities of the Fund. The effectiveness of the set-asides in assisting the Fund and other

parts of the drinking water program will be discussed in the following chapter.

Before beginning, it might be helpful to discuss what it means to be financially or programmatically

effective. It is difficult to point to any one indicator that will clearly identify one way or another that the

program is or is not effective. In a way, it depends on who is asking the question. As an example, for

Congress, the most important question might be — How much assistance is being provided for every

federal dollar appropriated? For an EPA staff member, the question might be — How much of the funds

that are available have states committed to loans? For a state DWSRF program manager, the question

might be — How are we doing in getting the projects built and the facilities in operation to address

specific compliance requirements? Obviously, there are many questions that one might ask in order to

come to some conclusion about effectiveness.

From a financial standpoint, the program’s effectiveness might be assessed by answering questions such

as:

• Are states taking the money that Congress has appropriated?

• Are states making loans?

• Are projects getting built and are loans getting repaid?

• What other funds have been invested in the program?

From a programmatic standpoint, the questions one might ask to determine if the program is effective

include:

• Is the program protecting public health?

• Is the program helping systems maintain compliance with drinking water standards?

• Are disadvantaged communities benefitting from the program?
DWSRF Report to Congress

48

Finally, since this is a revolving fund, it is important to ask how EPA and states are working to ensure

that funds will be available into the future. Throughout this chapter, progress is discussed as measured

against one or more of three values: the amount of federal capitalization grants, the amount of funds

available, and the amount of assistance provided.

▼ Financial Effectiveness

As noted in an earlier chapter, there

are many steps that must be taken

before funds are actually used to

build a project. In determining how

the program is progressing, several

milestones have been identified that

can help to tell the story (Figure 8-1).

EPA has also developed several

financial indicators to help assess the

health of national and state programs.

EPA worked with its state partners to

finalize the indicators, which were in

large part based on indicators

developed for the CWSRF program.

While no single indicator can identify

a state program as successful or

unsuccessful, taken as a suite they

paint a picture of the relative health of a state’s program. One important thing to note about the data

presented in this report is that it provides a picture of the program’s status through SFY 2001. Many of

the indicators discussed below can vary depending on the time period covered by the underlying data.

For example, a state could enter into a large loan agreement the day after the data is reported. This

would not be reflected in the data or the indicators.

X Are states taking the money that Congress has appropriated?

Through FFY 2001, Congress appropriated $4.418

billion for the program. Of this amount, $4.212

billion was available to states for capitalization grants.

The remainder of the national appropriation was

used for various national set-asides, including funds

for Indian Tribes and Alaska Native Village systems

and operator certification reimbursement grants.

Through SFY 2001, states had applied for and

received $3.648 billion in grants, or 87 percent of

available grants (Figure 8-2). The law affords states

two years in which to receive a grant. Thirty-three

states received part or all of their FFY 2001 grants in

the first year of availability. Some have questioned

why all states do not receive their grants in the first

Fund

Appropriations

Grant made

Loan executed

Project started

Funds disbursed

Project

completed

Repayments made

Figure 8-2 Cumulative Appropriations and Awards

Figure 8-1 Milestones in the DWSRF Process

0

1

2

3

4

5

1997 1998 1999 2000 2001

Appropriation Awarded Grants

State Fiscal Year

Dollars (in billions)
Chapter 8 — Financial and Programmatic Effectiveness

49

year, given the demand for funding. In the first year of the program only 18 states received a grant. The

number has increased since then, but many states are on an established schedule and work to develop

their IUPs, grant applications, and requests for projects at the same time every year and thus are not in a

position to accelerate their process to receive funds earlier. Some states also establish schedules by which

they can receive funds from two appropriations within one grant agreement.

X Are states making loans?

Before states even have the grant funds in

hand, they are working to identify projects

for funding. States must enter into

binding commitments with recipients in

accordance with a timeframe established in

their grant agreements. In most states, this

binding commitment is the same as

assistance provided in the form of a signed,

executed loan agreement. While the legal

requirement is that states enter into

binding commitments, when assessing

progress of the program, EPA believes it is

more important to look at the actual loans

that have been executed to determine when

the funds are made available to the

recipient. From SFY 1997 to SFY 2001,

the states have made considerable progress

in executing loans for projects. The

cumulative assistance provided as a

percentage of the funds available has

increased from one percent in 1997 to 72

percent in 2001 (Figure 8-3, Appendix B4). The assistance provided as a percentage

of federal funds shows that the federal

return is 123 percent. This is consistent

with the progress shown during the first

five years of the CWSRF program.

Although the majority of states have

executed loans for more than one-half of

their available funds, considerable

variability exists among the states (Figure

8-4). States with low percentages have faced challenges in implementing their programs, which are

further discussed in Chapter 11. As of June 30, 2001, $1.4 billion remained available for loans.

X Are projects getting built and are loans getting repaid?

Once a loan has been executed, states are focused on making sure that the projects get underway and are

completed. In many grant programs, including EPA’s wastewater construction grants program, there

were concerns that projects were taking far too long to be built. In the DWSRF program, states have a

3

8

23

17

0

5

10

15

20

25

0 to 25 26 to 50 51 to 75 > 76

Percent

Number of States

Figure 8-4 Assistance as a % of Funds Available

Figure 8-3 Utilization of Funds

0%

20%

40%

60%

80%

100%

120%

140%

1997 1998 1999 2000 2001

Percent

State Fiscal Year

Assistance as % of Funds Available

Assistance as % of grants
DWSRF Report to Congress

50

vested interest in ensuring that projects are

completed because repayments are required

to begin no later than one year after the

project is completed, although some states

require repayments to begin once the project

has started construction (or closed the loan).

Indicators that show project progress include

project starts, project disbursements, and

project completions (Figure 8-5, Appendix

B-9). To date, projects have been started for

approximately 89 percent of loan agreements

that states executed. While EPA does not

collect information on specific projects

funded through the program, the general

sense is that projects take anywhere from one

to four years to complete. While small

projects may take less time, and some large

projects may take more, the average

construction period is probably around three years. As construction proceeds, monies are disbursed to

recipients based on incurred costs. States have disbursed 58 percent of the funds in executed loan

agreements to recipients to cover costs (Appendix B-8). Projects have been completed for 46 percent of

the agreements, and because some states required repayments to begin before construction is completed,

principal repayments have been initiated on 46 percent of the projects (Appendix B-9). At three

percent, the actual amount of loan principal repaid as a percentage of the assistance provided is low, but

this will increase with time as the program matures (Appendix B-8). This can be demonstrated by

looking at the more mature CWSRF program. Repayments have increased steadily throughout the life of

the CWSRF program to the point where, in SFY 2001, loan principal repayments of $1.2 billion were

nearly equal to the program’s FFY 2001 appropriation of $1.35 billion.

X What other funds have been invested in the program?

The amount of funds added to the program

above and beyond the federal contribution is

significant. Funds have been added from states

through the required 20 percent match,

additional state contributions, earnings, transfers

from the CWSRF program, and proceeds from

bonds issued for leveraged programs. As noted

earlier, 15 states have used leveraging at some

point in their program to add $1.050 billion in

net bond proceeds available for projects.

Leveraging has allowed several states to fund

more than twice the amount of projects they

would have been able to fund through

capitalization grants alone. Some have pointed

Figure 8-5 Project Status Milestones

$0

$500

$1000

$1500

$2000

$2500

$3000

$3500

$4000

1997 1998 1999 2000 2001

Dollars (in millions)

State Fiscal Year

Assistance Provided

Project Starts

Project Disbursements

Project Completions

Loan Principal Repayments

Figure 8-6 Utilization of Funds Leveraged vs.

Non-Leveraged Programs

72%

123%

80%

203%

65%

83%

0%

50%

100%

150%

200%

250%

Assistance as a

% of funds available

Assistance as a

% of grants

Percent

All States Leveraged States Non-Leveraged States
Chapter 8 — Financial and Programmatic Effectiveness

51

to leveraging and asked why all states do not use the practice to increase the funds available for projects.

It is important to recognize that leveraging only makes sense if a state has sustained loan demand that

significantly exceeds the funds available. Also, a state needs to have the necessary management and

financial expertise to operate a leveraged program, which is significantly more complex than a nonleveraged program. When looking at some of the financial indicators, it is useful to separate out those

states that are leveraging from those that are not to see if there are any differences. Figure 8-6 shows

that the assistance provided as a percentage of federal capitalization grants is significantly greater for

leveraged states (203%) vs. non-leveraged states (83%). The assistance provided as a percent of funds

available is not as different—80 percent for leveraged states vs. 65 percent for non-leveraged states

(Appendices B-5 and B-6). One of the financial indicators developed by EPA looks at the estimated

additional DWSRF assistance that is provided as a result of leveraging. The total amount added for the

15 states using leveraging is $526.1 million. Through SFY 2001, four states had not yet achieved

additional benefits through leveraging. States that issue bonds must work hard to execute loan

agreements for the greater amount of funding. If projects fail to proceed in accordance with a state’s

anticipated schedule, this can cause problems. At least two states that experienced difficulties in

executing loans decided to suspend leveraging until they have enough projects ready to proceed.

When looking to judge the success of the program from the ability of the program to exceed the federal

investment, EPA considers the cumulative DWSRF assistance that has been disbursed against the

federal draws from the Treasury. EPA uses these figures, rather than the assistance provided as a

percentage of federal grants awarded, because they capture activities that have actually occurred. The

assistance provided as a percent of the grants awarded would include funds that had not been obligated

to projects and loan funds that had not yet been disbursed for construction costs. Using total

disbursements and federal Treasury draws for activity from the Fund (i.e., excluding non-administrative

set-asides), the disbursements as a percent of net federal outlays is 160 percent. Values for individual

states were as high as 518 percent. States with a value greater than 100 percent have disbursed more to

projects than they have drawn in federal funds for projects, which is accomplished through the

disbursement of state match and other monies in the Fund (e.g., bond proceeds, earnings). The

significant range of values observed for some of the indicators is reflective of the fact that, early in the

program, the highly variable nature of the data makes it difficult to apply financial indicators. The

indicators will become more useful and relevant when the data have a more historical basis.

▼ Programmatic Effectiveness

Some of the elements described in the previous section also speak to programmatic success in that public

health protection cannot occur if states are not executing loans and building projects. However, clearly

assessing the programmatic effectiveness of the program for public health benefits is somewhat more

difficult, primarily because no baseline exists against which to assess progress.

X Is the program protecting public health?

Examples provided on the following two pages and throughout this report show how the program is

financing projects that will protect public health now and in the future. EPA takes the view that all of

the projects that will be funded through the program will in some way benefit public health. Replacing

an aging distribution system will help to ensure that line breaks that could introduce contaminants into

the water supply do not happen. Consolidating a system with poor management with a viable system
DWSRF Report to Congress

52

Williston, population 14,500, is located

in the Northwest corner of North

Dakota, 18 miles from Montana and

approximately 65 miles from the

Canadian border. The community was

having problems meeting the Interim

Enhanced Surface Water Treatment Rule

and turbidity requirements, so they

designed a plan to improve their

treatment processes. The Williston

project is a multi-phase water treatment

plant improvement project. Phase 1,

funded by a $3.6 million DWSRF loan,

includes filter rehabilitation, transfer

pump improvements, instrumentation

and control upgrades, backflow

prevention devices, electrical

upgrades, replacement of the

traveling water screen, and raw

water pump upgrades. The Phase 2

project includes, among other

things, improved pre-treatment.

The City of White Salmon in Washington provided drinking water to a

residential population of 3,500 from Buck Creek, an unfiltered surface water

source and tributary to the White Salmon River. The only treatment

provided was simple chlorine disinfection. The city had numerous water

quality issues that triggered boil water advisories, including consistent

turbidity standard violations, sediment deposits, and rodent access to

breached air vents in storage reservoirs. In 1993, the City of White Salmon,

the City of Bingen, and the Port of Klickitat signed an agreement to create a

Multi-Jurisdictional Water Utility Consortium (MJWC) to address water

supply needs over the next 20 years. After instituting an extensive water

quality monitoring program, the city found Cryptosporidium oocysts and

Giardia cysts in the water supply. In the summer of 1999, a boil water

advisory went into effect until an alternate water supply could be developed

(June 1999-August 2000). The MJWC set a goal of having the first two

ground water production wells online by March 2002 with a deliverable

capacity of 2.60 million gallons per day to meet the projected 20 year

growth. This new ground water source will replace Buck Creek as the

primary source (Buck Creek will serve as an emergency backup supply only).

The project will also fund a booster station, distribution mains, and reservoir

storage. Of the project’s total $7.6 million price tag, $4 million was funded

by a DWSRF loan. The first well is online and the second is scheduled to be

completed in 2002.

The City of Elizabethton, Tennessee

received a $2 million DWSRF loan with

a term of 20 years and interest rate of

2.67% to complete improvements to the

Big Springs Water Treatment Plant and

install approximately 13,000 linear feet of

12-inch waterline along Max Jett Road.

The plant had been operating in

noncompliance with the provisions of the

Tennessee Surface Water Treatment

Rules because of two outstanding issues.

The first was the plant’s lack of availability

of filter-to-waste capabilities. Filter-towaste provisions protect the consumer

from small diameter pathogens such as

Cryptosporidium and Giardia lamblia,

among others. The second was the plant’s

inadequacy to treat highly turbid water.

Plant improvements included filter media

replacement, new instrumentation and

controls, new pumps, a backwash basin, a

new chlorination system, additional

clarification equipment, and

modifications to the existing building.

This project provides a safe and reliable

drinking water source to approximately

13,150 residents of the City of

Elizabethton and the surrounding

community.

Assuring Public Health and Compliance

Coliform and E.coli

The Harrybrooke condominium complex in New Milford, Connecticut

has had significant problems with its drinking water supply since1996.

Due to contamination from its septic system, Coliform bacteria and E. coli

were routinely detected in the raw water supply. As a result, numerous

violations were issued by the Connecticut Department of Public Health,

and the management of the complex frequently had to issue boil water

notices to protect the residents. In November of 1997, the 45

condominium owners applied for DWSRF funds. A $330,000 DWSRF

loan enabled the system to disconnect its well, install 2,700 feet of water

main, and install a service line to connect to a large regional water utility

(United Water Company). The residents of the complex no longer

receive boil water notices and now enjoy a safe supply of drinking water.

Surface Water Treatment Rule

Cryptosporidium and Giardia

Surface Water

Treatment Rule

Addressing

Microbial

Contaminants
Chapter 8 — Financial and Programmatic Effectiveness

53

Mississippi’s coastal city of Pascagoula is a deep-water

port that is home to manufacturing, shipbuilding,

international trade, and a U.S. Naval Station. The

water system serving the city’s 35,000 residents was

having trouble meeting the total trihalomethanes

(TTHMs) maximum contaminant level. The

TTHMs were the result of chlorine being used to

control the color of the water. The system also

experienced high levels of hydrogen sulfide in the

water.

To address these issues, the city decided to build three

reverse osmosis water treatment plants that would also

have ozone filters to treat for hydrogen sulfide.

DWSRF loans were used for the construction of all

three plants: $1.3 million for the first plant; $1.2

million for the second; and $1.5 million for the third

plant. When the first plant opened, the city was so

proud of the results that they gave away bottles of

their water and had “before” and “after”

samples to show the marked difference in

the quality of their drinking water.

The city is currently in the process of

building their third and final plant.

Abilene, Kansas received a $1.4 million DWSRF loan which

partially financed a $7.8 million water treatment plant.

Abilene now sells water to Dickinson Country Rural Water

District No. 2, whose wells had nitrate problems and were

under the influence of surface water from the Smoky Hill

River. The treatment facility is the first reverse osmosis

treatment facility in the state of Kansas, and provides for

softening, nitrate removal, and iron and manganese removal.

The project serves a total population of 7,700.

Mount Pleasant, in the southeast corner of Iowa, has a

population of approximately 8,000 people. It is home to

several industries including Goodyear and HON Industries as

well as direct mail houses and Iowa Wesleyan College. The

water system in Mount Pleasant drew water from three Jordan

aquifer wells and a surface water intake on the Skunk River.

Treatment at the wells consisted of aeration, filtration, and

chlorination, while surface water treatment included aeration,

coagulation/flocculation, clarification, activated carbon

addition, gas chlorination, filtration, and fluoridation. Storage

and pressure for the wells was provided by two ground storage

tanks, two elevated storage tanks, and three clearwell storage

tanks.

The city had several water problems: the Jordan aquifer is

highly mineralized; the water system had been experiencing

exceedances of the radium maximum contaminant level

(MCL) for several years; and customers expressed displeasure

with the iron content and hardness of the treated water. To

comply with the radium MCL, the system needed to

upgrade its treatment plant. Mount Pleasant

received a $5.9 million DWSRF loan, which,

when combined with utility reserve funds,

was enough to finance their needed

improvement project. Mount Pleasant

installed electrodialysis reversal units and a

ground storage reservoir. Construction of the

project was completed in 1999. In addition,

the utility decided to change the Oakland

Mills plant on the Skunk River from an active

source to an emergency standby source to

eliminate the need for surface water treatment in Mount

Pleasant. Mount Pleasant is now meeting the standard for

radium, and the citizens of Mount Pleasant are “very pleased”

with their treatment plant upgrade and the improved quality

of their finished water.

The Clinton Public Works Authority in

Oklahoma provides drinking water to

residents in six subdivisions. Many homes

in these communities were served by cast iron,

dead-end lines with leaded joints. Clinton had

problems with inadequate water availability to

individual households (pressure violations), stale

water caused by dead ends (bacteriological

violations), and lead contamination from lead jointed

cast-iron water mains. To address these problems, the

system replaced the inadequate drinking water

distribution lines. The project included replacing the

existing substandard lines with new PVC water lines;

constructing a loop trunk line to supply this area;

restoring affected drives and streets; and replacing fire

hydrants, valves, and appurtenances. A $644,000

DWSRF loan paid for most of the $963,700 project

– the difference was paid for by the water system.

Construction started in January 2000 and was

completed in April 2001.

Total Trihalomethanes

Nitrates

Radium

Lead

Addressing

Chemical

Contaminants
DWSRF Report to Congress

54

will help ensure that the system is properly maintained and

operated. Rehabilitating a ground water source to increase

flow will help to ensure that pressure in the distribution

system is maintained, thus removing the danger of

backsiphonage within the system. However, it is not

possible or feasible to point to the program and conclude

that 10,000 people are less ill today than before systems

received assistance.

X Is the program helping systems maintain

compliance with drinking water standards?

Although the results may not be discernible in the

compliance and enforcement tracking systems maintained

by states and EPA, evidence suggests that the program has

helped to return systems to compliance with national

primary drinking water standards. More than one-third of

the agreements and funds provided have gone to systems

out of compliance with health-based standards for projects

that will return or bring them to compliance. Some states

are working closely with their enforcement staff to make

sure that systems that are identified as being in violation of

a standard know that the

DWSRF is available for

financial assistance. It should

be noted that there is some

concern in the drinking water

industry that the program

appears to be focused on what

are considered the “bad players”

- the thought being that

systems which are out of

compliance will get the benefits

of low interest loans while more

proactive systems are left

seeking funding from less

affordable sources.

X Are disadvantaged

communities benefitting

from the program?

The third statutory focus of the

program was to help systems

with the greatest economic

need. All states must consider

the financial status of applicants

Castle Mountain Creeks Subdivision is a small development of 200 homes in

Idaho’s mountains approximately 45 miles north of Boise served by a surface

water system. In addition to lacking flow to sufficiently meet demand, the

system did not meet the requirements of the Surface Water Treatment Rule – the

system chlorinated the water, but did not filter it. A voluntary Consent Order

that detailed the steps the subdivision would take to bring the system into

compliance was signed with the Idaho Department of Environmental Quality.

An engineering firm was hired to prepare a report on the options available to the

subdivision. After consideration of the alternatives, a year-long pilot study was

conducted on-site. Upon completion of the pilot study, the subdivision was

awarded a $400,000 DWSRF loan to design and construct a diatomaceous earth

pressure filtration system, a pipeline chlorine contact chamber, and a new

100,000 gallon storage tank. The project was completed under budget at a cost

of $323,341.

Wyoming’s Bridger Valley Joint Powers Board provides water to 3,300 people

residing in several small communities. Bridger Valley had been under an EPA

Administrative Order for its numerous turbidity violations. The filtration plant

was severely inadequate – the plant had 12 inches of filter media which was 22

inches under the state-designated minimum amount. The system received a $6

million DWSRF loan to enable it to construct a new filtration plant to come into

compliance with SDWA and state requirements.

Returning Systems to Compliance in Idaho and Wyoming

Idaho Wyoming

Ohio

One objective of the DWSRF program

in the state of Ohio is to consolidate

small systems into larger, regional systems

so they may benefit from economies of

scale and better protect public health.

The Orchard Mobile Home Park is

located in Knox County, a rural area

between Columbus and Cleveland.

Orchard owned and operated a water

system that served its 150 residents. In

1999, Orchard was awarded a $89,836

DWSRF loan to abandon its well and

hook up to the larger Mt. Vernon Water

System. The connection was successful

and the park is now part of the larger

system.

Funding Consolidation in Ohio
Chapter 8 — Financial and Programmatic Effectiveness

55

in prioritizing projects. Many states have also used the flexibility afforded by the law to provide

additional subsidies to systems they had identified as disadvantaged using their own affordability criteria.

Twenty-six percent of all agreements have been made to systems identified as disadvantaged (16% of the

loan dollars). Repayment terms have been extended to up to 30 years in 10 percent of the total

agreements and principal forgiveness has been provided in 11 percent of the total agreements (some of

the agreements may have had either or both types of assistance). However, since the program must offer

loans that are at or below the market interest rate, all borrowers receive an economic benefit from

participating in the program. In fact, a grant equivalency for the program can be calculated. Table 8-1

shows the grant equivalency for a range of DWSRF interest rates and market rates. The national

weighted average interest rate of DWSRF loans made in SFY 2001 was 2.4 percent and the 20 year Bond

Buyer Index market rate was 5.3 percent. Therefore, a loan made at the average DWSRF interest rate of

about 2.5 percent provided the same subsidy that the recipient would have benefited from if it had

received a grant for 23 percent of the project’s cost, and financed the remaining amount at a 5.5 percent

market interest rate.

Beyond the statutory criteria that states had to consider in prioritizing projects for funding, the law had a

focus on providing assistance to small systems and also placed a strong emphasis on ensuring that systems

have technical, financial, and managerial capacity to operate sustainably. This report has already

discussed how small systems have benefited through the program. Their participation has exceeded the

expectations of the program and states should be applauded for their efforts to prepare these systems for

assistance and move them through the process. The capacity development requirements tied to receipt of

assistance have focused state attention on the needs of utilities in these areas and many states have

conditioned assistance to ensure that the systems have put measures into place to improve their ability to

effectively manage their facility. The next chapter on set-asides also highlights how states are using the

entire DWSRF program to target assistance in these areas. Assistance from the Fund has also been used

Market Borrowing Rate for Local Share

4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%

0.0% 32% 35% 38% 40% 43% 45% 47% 49% 51%

0.5% 28% 31% 34% 37% 40% 42% 44% 46% 48%

1.0% 25% 28% 31% 34% 36% 39% 41% 44% 46%

1.5% 21% 24% 27% 30% 33% 36% 38% 41% 43%

2.0% 17% 20% 24% 27% 30% 33% 35% 38% 40%

2.5% 13% 17% 20% 23% 26% 29% 32% 35% 37%

3.0% 9% 13% 16% 20% 23% 26% 29% 31% 34%

3.5% 4% 8% 12% 16% 19% 22% 25% 28% 31%

4.0% 0% 4% 8% 12% 16% 19% 22% 25% 28%

4.5% NA 0% 4% 8% 12% 15% 19% 22% 25%

5.0% NA NA 0% 4% 8% 12% 15% 18% 21%

Table 8-1 Grant Equivalence of DWSRF Loans

DWSRF

Interest

Rate
DWSRF Report to Congress

56

in some states to eliminate smaller systems

through physical consolidation. States are also

looking to ways to use funds to help restructure

systems to facilitate managerial consolidation

where physical consolidation is not feasible.

▼ Stewardship of the Program

The DWSRF program is envisioned as being a

perpetual source of funding for states to finance

needed drinking water projects, the idea being

that after several years of federal capitalization,

state programs should be able to provide

assistance using the repayment stream from earlier

loans. While states are responsible for ensuring

that this actually happens, EPA is responsible for

overseeing state programs to ensure that they are

meeting the intent of Congress and to identify

where technical assistance may be needed to

ensure that the states can provide assistance into

the future.

X Are states working to ensure that funds

will be available into the future?

The flexibilities Congress provided in the DWSRF

program, which allows for set-asides and principal

forgiveness, complicates this vision somewhat in

that heavy use of these provisions could leave less

money available to revolve through the loan Fund.

States must make considered decisions about how

they will allocate funds to ensure that the dual

program goals are met - protecting public health

and ensuring that a long-term source of funding is

maintained. Judging by how states have used funds, EPA believes that each state has considered its

needs and determined the best mix of funding. Nationally, states have reserved approximately 16

percent of the grant funds for set-aside activities and only 2.6 percent of the grants have been used to

forgive principal on disadvantaged loans. Although the numbers may vary on a state level, it would

appear that states are implementing their programs in a manner that will ensure long-term access to

funding.

One additional financial indicator assesses how well states are doing at maintaining the contributed

capital of their Funds. This net return value is computed by subtracting the state match bond principal

repayments and principal forgiven from the Fund’s retained earnings. Positive return values indicate that

expenses in the Fund are covered by revenues, even after match bonds are repaid or principal is forgiven.

Nationally, the net return for the program stands at $27.3 million.

The City of Cordova is a fishing community on

Prince William Sound in the Gulf of Alaska. The

typical winter temperatures range from 17 to 28° F,

and summer temperatures range from 49 to 63° F.

Fifteen percent of the 2,454 residents are Alaska

Native or part Native, and the city has an active

Village Council. The city was under a compliance

order from the state to upgrade its water treatment

system to meet the requirements of the Surface Water

Treatment Rule (SWTR). Cordova faced the

possibility of having to use the antiquated Eyak Lake

water filtration plant, which was problematic because:

the plant was expensive to operate and maintain due

to high energy costs in Cordova; the plant would have

required extensive upgrades to meet the requirements

of the SWTR; and a boil water notice and/or bottled

water provision may have still been necessary for

compliance.

Instead, Cordova applied for DWSRF funds. In

1998 and 1999, Cordova received a total of $2.5

million in DWSRF loans for the construction of access

roads, contact tanks, and distribution mains. The loan

included $1,155,000 in principal forgiveness because

the city qualified as a disadvantaged community. The

city also received two state grants totaling $2.4

million. Without all of this assistance, residents would

have faced a $51 monthly water bill. With the

subsidy, the monthly rate was kept to $39.

Construction was substantially complete in 2000 and

operations began February 1, 2000. The system is

now in compliance with the SWTR.

Providing Disadvantaged

Assistance in Alaska

Alaska
Chapter 8 — Financial and Programmatic Effectiveness

57

Some states, particularly those with leveraged programs, have developed cash flow models to help them

make program decisions. Early in the program, EPA distributed a simple model that would allow a state

to vary several factors including set-aside amounts, disadvantaged assistance, loan interest rates and

repayment terms, and bond usage so that they could see the impact of their decisions on the long-term

health of the Fund. This model had initially been developed to help EPA conduct budget projections

for the CWSRF program. It was extended for use for the DWSRF program, but was not user-friendly,

and was not widely used by states.

In 2000, EPA distributed a new, more powerful model which uses the information states have provided

through the DWNIMS for historical data on which to build projections. The model, based in Microsoft

Excel, is user-friendly and includes all the potential features of a DWSRF program. EPA has helped

several states to use the model and conducted training for state staff in EPA regional offices during 2001.

A few states have incorporated use of the model into the planning they do as part of the IUP process.

X Is EPA working to ensure that state programs are effective and sustainable?

In addition to developing modeling tools like the one described above, EPA has taken additional actions

to ensure that states have the information they need to effectively manage their programs. In many

respects, EPA views its oversight role as a means for supporting state programs. When issues are

identified in state programs through reviews, the Agency is able to direct assistance to state programs to

help them successfully resolve them. In large part, because states often learn best from other states, the

efforts of EPA are focused on sharing information about successful elements of state programs with other

states. This has been accomplished through the development of fact sheets, case study reports,

newsletters, and participation in national conferences. The Agency also helps to sponsor an annual SRF

workshop organized by the Council of Infrastructure Financing Authorities. The Agency has also

conducted four major training efforts for states - all of which took place in multiple EPA regions:

• 1997 - program start-up and general implementation

• 1999 - financial program management

• 2000/2001 - program management

• 2001 - financial modeling

In January 2002, the GAO released a report, Drinking Water: Key Aspects of EPA’s Revolving Fund Program

need to be Strengthened (GAO-02-135), which was critical of elements of EPA’s oversight of state DWSRF

programs. EPA is working to address the issues raised in the report. EPA Regional staff work closely

with state program staff and conduct annual reviews of state programs to ensure that the states are in

compliance with the regulations and terms and conditions of their grant agreements. The EPA Office of

Water also works in partnership with the EPA Office of the Inspector General to ensure that the financial

integrity of the program is maintained. EPA has encouraged states to conduct independent financial

audits of their Funds as a best management practice. Currently 43 states conduct an independent

financial audit or have a Single Audit that is the equivalent of an independent audit. The Inspector

General will periodically conduct audits for states that do not have independent audits and will also

review the quality of independent audits.
DWSRF Report to Congress

58

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Chapter 9 — Status of Set-Aside Funds

59

9 Status of Set-Aside Funds

The previous chapters largely dealt with a description of the status of the Fund, which provides

infrastructure assistance for drinking water projects. But, when looking at the DWSRF program, that

tells only part of the story. The major difference between the CWSRF program and the DWSRF

program is that Congress gave states the flexibility to use their programs to address other activities and

measures needed to protect drinking water and public health. Each state may set aside up to 31 percent

of its capitalization grant to conduct activities and establish and implement programs that place a strong

emphasis on preventing contamination problems through source water protection and encourage better

system operations through enhanced water systems management. Although the need to address

infrastructure projects through the Fund is great, all states have recognized the importance of

preventative measures and have set aside some portion of their grants for these activities. This chapter

discusses how funds have been directed in the set-asides. The subsequent chapter provides examples of

the many types of activities that states have funded using the flexibility afforded to them.

Through SFY 2001, 15.8 percent ($575.8

million) of the total amount of funds that

have been provided to states through

capitalization grants has been allocated to setaside activities. States have reserved anywhere

from 6.7 to 31 percent of their total grants for

set-asides (Figure 9-1, Appendix B-19). The

DWNIMS does not track activities conducted

under individual grants; rather, it tracks

activities that occur in any given fiscal year.

However, EPA also tracks the amount of each

set-aside states have reserved from each grant

through its grant and financial management

systems using the distinct accounting codes

associated with each of the four categories of set-asides. The greatest amount of set-asides was reserved

from the FFY 1997 appropriation, primarily because of the availability of a one-time set-aside to

conduct source water assessments. States reserved 20 percent of the FFY 1997 appropriation and have

reserved about 14 percent of each subsequent year’s appropriations.

States must describe how they will use set-aside funds in workplans, most of which range from one to

three years. Funds cannot be reserved if a state cannot identify a specific use for them. With the

exception of set-asides associated with the local assistance category, states can reserve the authority to

reclaim funds they have not reserved from a future grant as long as they do not exceed the cumulative

Figure 9-1 Funds Reserved for Set-Asides

0

9

13

10

13

6

0

5

10

15

0 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 31

Percent of Grants

Number of States
DWSRF Report to Congress

60

% of Funds reserved

3.2% 8.7%

20.6%

33.6%

42.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1997 1998 1999 2000 2001

Dollars (in millions)

$135.4

$74.5

$0.8

$60.0

$0

$50

$100

$150

Reserved Administrative

expenses

Technical

Assistance

expenses

Remaining

$54.2

$24.3

$29.9

$0

$10

$20

$30

$40

$50

$60

Reserved Expenses Remaining

Dollars (in millions)

Figure 9-4 Administrative Set-Aside

Figure 9-5 Small System Technical Assistance Set-Aside

caps on the set-aside category (see box, page

61). Through SFY 2001, states had expended

$244.6 million, or 42.5 percent of the total

funds that had been reserved (Appendix B-20).

On a state by state basis, states had expended

anywhere from 7 to 77 percent of the funds

they had reserved (Figure 9-2). EPA has had

concerns about the slow progress in spending

set-aside funds, but the progress has improved

considerably through time, increasing from 8.7

to 42.5 percent from SFY 1998 to SFY 2001

(Figure 9-3). Because funds are expended in

accordance with a workplan, it is reasonable to

expect that roughly one-half to one-third of the

funds will be unspent in any given year.

▼ Administration and Technical

Assistance

States may reserve up to 4 percent of their

allotment to administer the DWSRF program

and provide technical assistance to public water

systems. Nationally, states have reserved

$135.4 million (3.7 percent of their grants) for

these activities (Figure 9-4, Appendix B-21).

Forty-two of the states have reserved the full 4

percent available under the set-aside.

States have expended $75.3 million of the

amount that has been reserved. At 55.6

percent, the set-aside has the highest

expenditure level of any of the four categories.

On a state basis, states have expended from 10

to 100 percent of the funds they have reserved for the category. Funds have predominantly been used to

cover the costs of administering their DWSRF programs. Only four states have used funds to provide

technical assistance to public water systems.

▼ Small System Technical Assistance

States may reserve up to 2 percent of their grants to provide technical assistance to small systems that

serve 10,000 or fewer people. Nationally, states have reserved $54.2 million (1.5 percent of their grants)

for this category (Figure 9-5, Appendix B-22). Twenty-three states have reserved the entire amount

available, while only two have not reserved any funds.

States have expended 44.8 percent of the funds that have been reserved for the set-aside, with individual

state expenditures ranging from zero to 100 percent. The $24.3 million expended to date has gone for a

5

17

25

4

0

0

5

10

15

20

25

30

0 to 20 20 to 40 40 to 60 60 to 80 80 to 100

Percent of Funds Reserved

Number of States

Figure 9-2 Funds Expended for Set-Asides

Figure 9-3 Cumulative Set-Aside Expenses
Chapter 9 — Status of Set-Aside Funds

61

wide range of activities. States have

used the funds for activities which

include planning grants to systems,

visits from technical assistance

providers and circuit riders, and

training. Many states have

contracted activities to state rural

water affiliates since these technical

assistance providers are accustomed to

working with small systems. To get a

sense of how many systems are

benefitting from assistance, EPA asks

states to report on the number of

systems that are reached through the

technical assistance. The systems

that can be counted include those

that receive direct assistance,

including but not limited to face-toface meetings and attendance at

workshops/conferences. It does not

include systems reached by indirect

assistance (e.g., mass mailings, media, internet). A system may, however, be counted if it receives

extended assistance via phone, fax, e-mail, or interactive internet communication. States have reported

assisting more than 55,000 water systems. It is important to recognize that this includes double

counting of systems that receive more than one instance of assistance over multiple years. However, it

serves to give an idea of the connections that states have made with public water systems using the setaside.

▼ State Program Management

States can reserve up to 10 percent of their allotment for programs and activities that help strengthen the

programs they administer to protect drinking water and public health. There are four general activities

eligible for assistance under the set-aside category. States can use funds to supplement funding for their

PWSS programs. The PWSS program, funded in part by federal PWSS grants, is the program through

which state drinking water programs exercise their primary enforcement authority for carrying out

national primary drinking water regulations. States can also use funds under the set-aside to develop and

implement their capacity development and operator certification programs, the requirements of which

were added or substantially upgraded through the 1996 SDWA Amendments. Finally, states can use

funds to administer a source water protection program through which they can provide technical

assistance to public water systems to prevent contamination of sources of drinking water.

Nationally, states have reserved $146.6 million (4 percent of their grants) for state program management

activities (Figure 9-6, Appendix B-23). Nine states have reserved the full amount allowed and seven

states have reserved none of the funds under the set-aside.

Reserving Authority for Set-Aside Activities

A state is receiving a $10 million grant in FFY 1998. The state may

take up to 2 percent of its grant to provide small system technical

assistance. The state has determined that it needs $100,000, or 1

percent, to fund a circuit rider program and elects to reserve the

authority associated with the remaining 1 percent allowed under

the set-aside for future use. In FY 2000, the state decides to

implement a program to provide small grants to help systems

conduct planning and design for infrastructure projects. The state

will also receive a $10 million grant for FY 2000. The state will use

$200,000, or 2 percent, of the grant to conduct these activities and

will also recover the remaining authority associated with its FY

1998 grant—an additional $100,000. Therefore, technically the

state will take $300,000, or 3 percent, of its grant to conduct small

system technical assistance. While the state will exceed the 2

percent statutory cap for the grant, it will not exceed the cap when

calculated on the basis of the cumulative grants that have been

received. EPA takes the view that this approach is preferable to

having states reserve funds in abeyance with no immediate use. In

this way, states may target funds where they are most needed and

can maintain flexibility to address new programs in the future.
DWSRF Report to Congress

62

States have expended $67.8 million

(46.2 percent) of the total funds

reserved under the set-aside. Most of

the funds ($42.7 million) have been

used to supplement the PWSS

program. Twenty-nine of the 44

states reserving funds for this category

spent funds for this activity. Over the

past several years, approximately $93

million has been made available

annually to states and tribes for

carrying out their PWSS programs through federal PWSS grants. In the last two years, states have

expended more than $15 million annually from this set-aside to supplement their programs as they

work to strengthen their base programs and implement new regulations.

States have spent $12.2 million to supplement their source water protection programs. Over the past

few years, states have been focused on conducting required assessments of all sources of drinking water in

their states. Eighteen of the states have used funds under this set-aside to support that effort and to

begin to promote protection activities. For example, Massachusetts uses funds under the set-aside to

provide small grants (not to exceed $45,000) to public water systems and technical assistance providers

to implement protection measures.

States have spent $7.3 million developing and implementing capacity development programs required in

the 1996 SDWA Amendments. The program is focused on helping public water systems achieve and

maintain adequate technical, financial, and managerial capacity to ensure that they are able to provide

safe drinking water to their customers. States were required to obtain the authority to ensure that no

new public water systems could be developed which lacked capacity. States were also required to develop

strategies to address capacity issues for existing public water systems. The failure to meet these

requirements would have subjected a state to a withholding of DWSRF grant funds. Fortunately, none

of the states were subject to withholding for failing to meet the requirements. Twenty-one of the 44

states reserving funds in this category have used funds to develop and implement their programs. With

all state strategies approved as of October 2000, EPA expects that states will increase use of this set-aside

to implement new activities under their strategies. While annual expenses for the PWSS activity stayed

flat from SFY 2000 to SFY 2001, annual expenses under the capacity development set-aside increased by

more than one-third.

Finally, states have spent $5.6 million to develop and implement their operator certification programs.

Most states have had programs to certify operators for public water systems for many years. However,

the requirements of state programs varied widely. The 1996 SDWA Amendments required that states

develop comprehensive programs in accordance with guidance developed by a workgroup with

representatives from EPA, states, and stakeholder organizations. States that failed to develop programs

for approval would be subject to withholding of their DWSRF grants. State operator certification

programs required under the law are still undergoing review by EPA. However, 42 programs had been

approved through December 2001, and EPA does not anticipate withholding funds from any states.

Expenses

$146.6

$42.7

$12.2 $7.3 $5.6

$78.9

$0

$20

$40

$60

$80

$100

$120

$140

$160

Reserved

PWSS

Source Water

Protection

Capacity

Development

Operator

Certification

Remaining

Dollars (in millions)

Figure 9-6 State Program Management Set-Aside
Chapter 9 — Status of Set-Aside Funds

63

Twenty-three of the 44 states reserving funds under the state program management set-aside have spent

funds to assist their operator certification programs.

The state program management set-aside differs from the other categories by requiring states to provide

an additional dollar for dollar match in order to access the funds. The law allowed states to use the

matching funds and additional funding provided on state PWSS grants in fiscal year 1993 as a basis for

determining a credit towards meeting the match, with the condition that at least 50 percent of the

match be provided from current overmatch on PWSS grants, state in-kind services, or new funding.

States may provide the match at the time of the grant award or at the time expenditures are made.

Through SFY 2001, states had provided $127.4 million in match as new funding or in-kind services.

This amount exceeds the expenditures to date by $59.6 million.

▼ Local Assistance and Other State Activities

States may use up to 15 percent of their capitalization grants to fund a variety of activities that support

source water protection and enhance the technical, financial, and managerial capacity of public water

systems. There are five general activities eligible under the set-aside category. States may use no more

than 10 percent of the set-aside on any one activity. Two of these activities are loan programs that

address source water protection. Two additional activities address source water protection for surface

water and ground water sources and a final activity provides for financial and technical assistance to

public water systems in support of a capacity development strategy.

Nationally, states have reserved

$239.6 million (6.6 percent of

their grants) for this set-aside

category (Figure 9-7, Appendix

B-24). While six states have

reserved the full 15 percent,

every state has reserved funds

under this set-aside in order to

access a one-time set-aside from

FFY 1997 grants.

States have expended $77.2 million (32.2 percent) of the amount of funds reserved under the set-aside.

Most of the funds ($49.2 million) have been spent to support source water assessments. The 1996

SDWA Amendments required that each state conduct an assessment of the sources of drinking water for

all public water systems in order to determine their vulnerability and susceptibility to potential sources

of contamination. States were required to develop source water assessment plans for EPA approval and

expend the funds in accordance with those plans. Therefore, almost all states took the full 10 percent

allowed under the law from the FFY 1997 appropriation to support this activity. States have

subsequently made adjustments to their original intended allocation of funds under the category, but

EPA estimates that close to $112 million in funds were allocated for the activity. Thus, states have

expended approximately 43 percent of the funds they intended to use for assessments. Most states will

likely complete assessments by the end of 2003.

Expenses

$239.6

$1.9

$49.2

$14.9 $11.3

$162.4

$0

$50

$100

$150

$200

$250

Reserved

Dollars (in millions)

Source Water

Protection Loans

Source Water

Assessments

Wellhead

Protection

Capacity

Development

Remaining

Figure 9-7 Local Assistance and Other State Programs Set-Aside
DWSRF Report to Congress

64

Two of the activities eligible under this set-aside category have not been a success to date. States may use

funds to provide loans to public water systems to either purchase land or conservation easements needed

to protect sources of drinking water or to implement voluntary, incentive-based source water protection

measures. While several states have developed programs (12 states for land acquisition and easements; 5

states for protection measures), only three states (Maine, Vermont, and Kentucky) have managed to

make land acquisition loans. These three states have made eight loans totaling $1.9 million which have

protected 1,400 acres of land. No states have made loans to fund protection measures. In many cases,

public water systems are not interested in taking out loans to conduct these activities and the CWSRF

program proves to be a more attractive source of funding by which to achieve similar goals. EPA hopes

that activity under the loan programs will increase as assessments are completed and public water systems

determine actions they must take to protect their sources of drinking water. EPA is also encouraging

public water systems to enter into partnerships with land trust and conservancy organizations to identify

and manage critical protection areas.

The activity that allows states to use funds to develop and implement wellhead protection programs to

protect ground water that serves as a drinking water source has been more widely used. In part, this is

due to the fact that many states had already developed wellhead protection programs and did not have to

develop a program from the ground up. Twenty-six states have spent a total of $14.9 million to fund

protection activities. Many states have used funds to develop education programs intended to heighten

awareness of the general public and local leaders on the importance of protecting the aquifers that

provide the water they drink. Now that states are fully implementing source water protection programs

(of which wellhead protection is a component), some states have expressed concerns that there does not

appear to be a similar opportunity to use funds to address activities similar to those conducted under

wellhead protection for surface water sources.

The final activity under this set-aside category allows states to use funds to provide technical and

financial assistance to public water systems as part of their strategy for addressing the capacity of new and

existing systems. Assistance has been provided by both state staff and third party contractors. Seventeen

states have spent a total of $11.3 million on this activity. As with the activity addressing capacity

development under the state program management set-aside category, spending has increased for this

activity over time as states implement their strategies. States have indicated that they have assisted more

than 5,600 water systems using funding from the set-aside.
Chapter 10 — Set-Aside Activities Funded

65

The flexibility provided to states to fund a wide range of activities using set-asides to help support their

drinking water programs made it difficult to develop a tracking system similar to that developed for

information on infrastructure projects. While the previous chapter summarized state use of funds in

accordance with the categories of set-asides identified in the law, reality does not break down so cleanly.

In many cases, states can fund an activity using more than one of the set-asides. In reviewing state IUPs,

Annual/Biennial Reports, workplans and other promotional information EPA identified several areas in

which states are focusing their efforts, including (1) enhancing technical, financial, and managerial

capacity of systems; (2) enhancing operator certification programs; (3) providing technical assistance to

small systems; (4) facilitating partnerships; (5) improving public outreach; (6) supporting drinking water

programs; and (7) promoting source water protection.

▼ Enhancing Technical, Financial, and Managerial Capacity

By enhancing system operations and ensuring the technical, financial, and

managerial capacity of public

water systems, states can promote

greater long-term compliance

with the SDWA. As required by

the SDWA Amendments, all

states are implementing programs

to ensure that new systems have

capacity and have developed

strategies to ensure that other

water systems within the state

obtain and maintain capacity.

From on-site technical assistance

to managerial training and direct

financial support, states are

funding a wide range of activities

to promote system capacity.

X Reducing the number of systems through consolidation and regionalization

Almost 60 percent of community water systems serve fewer than 500 people. These very small water

systems often lack the economies of scale that develop with a larger customer base to maintain adequate

capacity. Consolidation and regionalization of systems results in lower facility, operation, and treatment

costs. Some states, including Pennsylvania and Utah, have separate funding programs to promote

10 Set-Aside Activities Funded

Enhancing Technical, Financial, and

Managerial Capacity

Challenges

• Maintaining or improving capacity of small

systems that lack economies of scale

• Improving operation and management skills of small

system operators

• Ensuring adequate capacity for DWSRF loan eligibility

Solutions

• Use holistic approach to address technical, financial, and managerial deficiencies

• Provide incentives to promote consolidation and regionalization

• Establish training and technical assistance programs for small

systems
DWSRF Report to Congress

66

consolidation. These programs help to increase the number of customers per treatment facility while

raising revenues and reducing treatment costs.

Pennsylvania offers a program that provides incentive grants to encourage regionalization and

consolidation of small systems. In addition, grants are offered to systems to study the feasibility of

regionalization and consolidation and to implement recommendations from these feasibility studies or

other consolidation projects. The program requires grant recipients to achieve adequate technical,

managerial, and financial capacity.

In 1998, Utah initiated a $1 million study with monies from its Drinking Water Board, Community

Impact Board, and Community Development Board for its Regional Water Planning Initiative. The

Initiative recognized that many of Utah’s small water systems share the same water sources, and

sometimes water treatment needs, often with contiguous or even overlapping service areas. Management

Plans developed on a county-by-county basis discuss possibilities of joint source protection efforts,

sharing of managers, operators, equipment, and facilities (existing and proposed), and especially

consolidation of water systems. Plans were developed for 24 of Utah’s 27 counties, with only the three

largest counties not participating. For many of the small water systems, recommendations were made to

regionalize or to consolidate with neighboring systems to broaden the base of revenues and other

resources and to improve cost-effectiveness. Those water systems with a record of noncompliance who

choose not to accept the recommendations in their respective county’s Water Management Plan are

ineligible to receive DWSRF loans from the state. The highest profile success of the Initiative has been

in the unincorporated areas of Summit County that surround Park City, host of a number of 2002

Winter Olympics events. Approximately 10 to 15 small water systems in this area historically have

litigated over shared water sources and have competed in common service areas oftentimes with

redundant distribution system facilities. Under the umbrella of the new county water agency, the

Mountain Regional Water Special Service District, five of the 10 to 15 systems in the county were

consolidated into the District in 2001 with likely consolidation of the others by 2002.

X Training operators and managers to improve technical, financial, and managerial skills

States such as Vermont, Tennessee, and Hawaii used DWSRF set-aside funds to offer various training

programs at reduced costs to improve the operation and management of systems. Through a grant to the

Northeast Rural Water Association, Vermont offers several types of assistance to small systems including

on-site training and management assistance. Specifically, training and assistance is provided on all

SDWA compliance related topics, on any aspect of project development and the DWSRF loan process,

and on identifying and applying for other sources of funding. Tennessee used set-aside funds to contract

with the Fleming Training Center to provide operator and management training programs. The Center

offers programs on all aspects of water system operations including cross connection control, water

laboratory workshops, and chemical addition seminars. As part of its capacity development strategy,

Hawaii entered into a contract with the Rural Community Assistance Corporation to provide training

courses to more than 100 managers and 300 operators representing municipal and private water systems

throughout the islands. Training included assistance in preparing water system distribution operators

for the distribution system operator certification exam.
Chapter 10 — Set-Aside Activities Funded

67

X Assessing system capacity to determine DWSRF loan eligibility

The DWSRF program requires that loan applicants have the technical, financial, and managerial

capacity to ensure compliance with the requirements of the SDWA. Some states, such as Idaho and

Texas, have used set-aside funds to facilitate the capacity assessment of their loan applicants. Idaho

developed a screening tool which walks the reviewer through a series of indicators to assess the capacity

of potential borrowers. The Environmental Finance Center at Boise State University was contracted to

prepare the actual capacity assessments of the applicants. Texas used set-aside funds to hire a

contractor to assist with providing assessments of, and on-site assistance to, prioritized systems to move

them toward compliance on a voluntary approach. Assessments are also conducted for the applicants

who must demonstrate they have developed the capacity, or will through funding, to operate a viable

successful system before the DWSRF may be used to finance improvements.

▼ Enhancing Operator Certification Programs

Ensuring the knowledge and skills of public water system operators is considered an important, costeffective means to promote public health protection. Proper operations and maintenance by qualified

operators can also prevent premature depreciation of drinking water infrastructure. Therefore, it is

essential that operators of public water systems have adequate training. The 1996 SDWA Amendments

required each state to implement programs that meet minimum requirements for the certification and

recertification of operators of community and nontransient noncommunity water systems. States have

used DWSRF set-asides to fund a number of operator certification training and implementation

activities.

X Expanding operator certification classes and programs

By expanding operator certification classes and programs, many states such as Georgia, Texas, and

Nebraska are furthering SDWA objectives and facilitating the certification process. Supporting the

enhancement of training opportunities allows states to ensure proper system operation. Georgia entered

into a contract with Georgia Water and Wastewater Institute (GWWI) to provide training of water,

wastewater, and laboratory analysts in FY 2000. In one year, more than 1,000

students attended 80 training

courses held by the Institute.

GWWI expanded its training

methods to include participation

in Georgia Water and Pollution

Control Association District

Meetings, Spring, Fall, Annual,

and Industrial Conferences, and

provided on-site assistance to

water and wastewater personnel.

Early training opportunities for

potential operators in Texas are

offered through a water system

curriculum in high schools to

encourage entry into the water

supply business. The state hopes

Enhancing Operator Certification

Programs

Challenges

• Reaching operators of small, rural

systems in remote locations

• Providing affordable training and certification

programs

Solutions

• Leverage existing educational outlets to expand number of

certification courses offered

• Provide on-site training opportunities

• Subsidize cost of training and certification or offer financial

assistance to operators
DWSRF Report to Congress

68

Providing Technical Assistance to

Small Systems

Challenges

• Providing assistance to small systems in

remote locations

• Preparing required documentation for DWSRF loan eligibility

Solutions

• Hire circuit riders to provide on-site assistance

• Offer off-site technical assistance (i.e., online or via telephone)

• Organize peer support relationships between small and large

systems

to bring more qualified operators to the industry by providing early training and certification. Nebraska

contracted with several organizations to enhance training opportunities. As a result, the Nebraska

Environmental Training Center now provides specialized one-day workshops for continuing education

units designed to teach water treatment operations, associated operation and maintenance costs, and

chlorination and fluoridation processes. Funds also supported a mentor program for small systems and

teleconference registration assistance to qualifying systems.

X Partnering with universities, colleges, and extension services

Partnering with universities, colleges, and extension services allows states to provide unique opportunities

for systems operators wishing to continue their education. Continuing education is critical in ensuring

that owners and operators of water systems are knowledgeable about the newest technologies and

regulations affecting the water industry. New Jersey contracted with Rutgers, the State University of

New Jersey, to reduce the cost for operators taking courses that fulfill continuing education requirements.

Under this program, licensed operators receive a discount on course tuition.

▼ Providing Technical Assistance to Small Systems

Small water systems often face a great challenge in meeting new SDWA requirements because these

systems often lack the resources to properly train operational and managerial personnel. They also

typically have extremely limited financial resources and a small customer base. Small systems benefit

from a variety of programs aimed to make operations safer and more efficient. Many states are using setaside funds to provide on-site technical assistance, staff circuit rider programs, offer training sessions for

managers and operators, and provide assistance identifying and applying for funding from various

sources.

X Assisting small systems in applying for DWSRF funding

Small systems comprise the majority of community water systems in the nation. While these systems

may have difficulty providing adequate documentation for DWSRF loan eligibility, they have the

greatest need for funding. Programs in states such as New York and New Hampshire

have facilitated the application process for small systems. New York used setaside funds to expand its peer

assistant program—the Small

Water Systems Program.

Although the main goal of the

program is to provide information

and publications that allow

systems to complete applications

on their own, direct assistance is

also available. The program

includes providing guidance to

communities applying for funding

from the DWSRF and other

sources, calculating project costs,

preparing budgets, selecting

projects, preparing engineering
Chapter 10 — Set-Aside Activities Funded

69

reports, and filing for disadvantaged loan status. New Hampshire has worked with several contractors to

provide a range of services throughout the state to facilitate the loan application process. Programs

include assistance in completing applications for DWSRF funding and other sources, education and

outreach, on-site visits to identify the needs and deficiencies of the system, and project management,

coordination, and inspection assistance.

X Providing assistance for developing engineering reports and design plans

Small systems often lack the resources to hire an engineering firm to prepare the plans and specifications

and other documentation necessary to be eligible for DWSRF loans and other types of assistance. Many

states, including South Carolina, Virginia, Missouri, and Oregon use DWSRF funds to assist small

systems through grants to hire private contractors or by offering the assistance of qualified state staff.

South Carolina has a multi-level planning and development program. The program reviews sanitary

surveys, water quality sampling results, compliance schedules, operating budgets and rates, and

information concerning future needs. The second phase involves detailed evaluation of the viability of

the system. Management, operations, facilities, and financial plans are analyzed and improvement plans

for technical, financial, and managerial problems are offered. The third phase involves assisting in the

completion of a business plan to ensure future viability through detailed facilities engineering reports,

management structure recommendations, and financial plans that include the identification of

construction costs if DWSRF or other funding is needed.

Virginia offers planning and design grants to private and public small community water systems. Grants

are provided to small, rural, financially-stressed community water systems serving fewer than 3,300

persons for up to $25,000 per project. Projects include preliminary engineering reports, design of plans

and specifications, performance of source water quality and quantity studies, and the drilling of test

wells. Missouri and Oregon also provide engineering service grants aimed at very small systems. These

grants fund the cost of preparing an engineering report (up to $10,000), which is then used to

determine if the system is eligible for DWSRF loans or other sources of funding.

X Helping small systems assess and enhance capacity

By assisting small systems with capacity assessment, some states such as Delaware and Wisconsin are

helping to increase the efficiency and viability of small systems. Delaware developed a technical

assistance program for small system capacity development. The program, designed and implemented by

the Delaware Rural Water Association, provides hands-on assistance to systems throughout the state on

matters including safety issues, emergency response preparedness, leak detection, and budget planning.

Financial assistance training is also available to all DWSRF applicants through the program. Similarly,

Wisconsin, in conjunction with the Wisconsin Rural Water Association, scheduled visits to targeted

small systems and provided assistance with preparing consumer confidence reports, operator certification,

SDWA compliance issues, and operations and maintenance. Educational sessions on these and other

topics affecting small systems were also offered through the University of Wisconsin.

▼ Facilitating Partnerships

Partnerships are an essential tool for states and water systems because participants aid each other and

mutually benefit. Duplication of effort is avoided by partnering with other entities in the state with

similar goals. Furthermore, the consolidation of financial resources allows states to provide even greater

assistance to water systems. Several states have used set-aside funds to establish partnerships between
DWSRF Report to Congress

70

agencies within the state and with other entities such as universities and trade organizations. Other

states are using the funds to encourage partnerships between systems (particularly small systems) for

purposes of enhancing capacity.

X Partnering with colleges, universities, and extension services

Colleges, universities, and extension services offer technical expertise and training capabilities to states

and water systems on a wide range of technical, financial, and managerial topics. Many states are

directing set-aside funds to local colleges and universities to obtain these services through an existing

framework. Kentucky works with universities on system analyses for water systems

throughout the state. The

University of Cincinnati was

contracted to conduct a

distribution system study to

validate an EPA Model.

Northern Kentucky University

was contracted to evaluate a

plant and distribution system and

conduct extensive water testing at

the system for a one year period.

Montana contracted with the

Montana State University to

create a CD-ROM training

device on source water

assessment and delineation procedures. Nevada contracted with the University of Nevada for various

activities. The Reno Cooperative Extension is in charge of source water protection education and

distance training for operators. Activities included creating a web page, gathering and coordinating

source water information to make available in a “clearinghouse” website, and using existing models to

further develop education programs. The Las Vegas branch of the extension has also been contracted to

provide assessments of the Colorado River and Lake Mead.

X Partnering with water system professional and trade organizations

Organizations such as the American Water Works Association (AWWA), the National Rural Water

Association and the Rural Community Assistance Programs have provided technical assistance to water

systems of all sizes for many years. Through partnerships with these and other organizations, several

states have greatly expanded the types of assistance offered and the number of systems that receive

assistance. Florida contracted with the Florida Rural Water Association and the Florida Association of

Community Action to offer a range of technical assistance to small systems. Services provided include

assisting with the preparation of DWSRF loan documents, providing capacity assessments to small

systems and designing plans for improving capacity, assisting with the development of business plans,

developing and implementing source water protection programs, and helping with on-site technical

issues. In Oklahoma, the Rural Water Association has been working to ensure that at least 200

assistance visits are made annually to small systems throughout the state to help improve operational

and managerial abilities to meet SDWA requirements. Assistance has resulted in improved compliance

rates and enhanced managerial attributes.

Facilitating Partnerships

Challenges

• Providing adequate training and technical

assistance to meet diverse needs

• Avoiding duplication of effort

Solutions

• Leverage resources by combining funds with other agencies and

organizations

• Use existing frameworks and expertise
Chapter 10 — Set-Aside Activities Funded

71

Indiana utilized the expertise of technical assistance providers to conduct various activities funded

through DWSRF set-asides. The Indiana Section of the AWWA and Rural Water Association are

responsible for staffing a toll-free helpline and conducting technical assistance workshops throughout

the state. Nebraska established a “Two-percent Team” to bring technical assistance partners together to

address system capacity needs. The team meets monthly and identifies systems that need assistance by

reviewing violation notices, expanded sanitary surveys, or applications for DWSRF or other financial

assistance. The team includes the Nebraska Environmental Training Center which conducts workshops

on water treatment operations, chlorination, and fluoridation, and the Midwest Assistance Program,

which provides systems with a financial self assessment tool. Other partners include the League of

Nebraska Municipalities, the Nebraska Rural Water Association, and the Nebraska Section of AWWA.

▼ Improving Public Outreach

Support of the public is vital to address and prevent threats to drinking water quality. One of the goals

of the SDWA Amendments is to provide better information to the public on the quality of drinking

water. The Amendments emphasize public information and the consumer’s right-to-know to ensure that

drinking water program implementation by states is responsive to public needs. States have used setasides to fund a variety of public outreach initiatives.

X Conducting outreach at conferences

States wish to promote the benefits of the DWSRF program to as many systems as possible.

Several states utilize a variety of promotion opportunities at conferences that are

held throughout their state.

Louisiana DWSRF staff regularly

attend the Louisiana Municipal

Association’s annual convention,

the Louisiana Police Jury

Association’s annual convention,

and the Louisiana Rural Water

Annual Training and Technical

Conference to distribute

DWSRF information to

interested parties. Louisiana

DWSRF staff present funding

opportunities at training sessions

throughout the state. South

Carolina also uses conferences

attended by utility personnel as

an effective means to market the

DWSRF program. Conferences are held by the South Carolina Rural Water Association, the South

Carolina American Water Works Association, the South Carolina Municipal Association, the South

Carolina Association of Counties, and the South Carolina Association of Special Purpose Districts.

Improving Public Outreach

Challenges

• Informing the public about health

concerns from drinking water

• Promoting the DWSRF as an important

source of funding

• Educating key decision makers on drinking

water issues

Solutions

• Conduct public awareness campaigns statewide

• Develop outreach materials

• Provide targeted training for local government officials and water

system professionals
DWSRF Report to Congress

72

X Publishing educational materials

Many states publish materials to promote drinking water program awareness. These are often in the

form of mailings or newsletters. Louisiana sends mailings to all systems and engineers across the state

and promotes the DWSRF program in the state’s Safe Drinking Water newsletter, “The Water Funnel,”

distributed quarterly. Delaware created a quarterly newsletter through set-aside funding. The newsletter

is mailed to all public water systems in Delaware and interested stakeholders, to inform the drinking

water system community of regulations, requirements, and other beneficial information. Washington has

created a quarterly newsletter, “Water Tap,” which provides information on drinking water topics such as

the DWSRF program, application deadlines, and public hearing notification. Special issues of the

newsletter highlight the successes of the state’s DWSRF program.

X Conducting public awareness campaigns

Several states have tried to involve the general public in, and educate the public about drinking water

issues by conducting public awareness campaigns. New Mexico has established “Water Testing Fairs”

throughout the state. The fairs allow the New Mexico Bureau of Water to have direct contact with the

public at scheduled fair exhibitions. Pamphlets on health effects and other pertinent information are

distributed. Alabama conducted three “Drinking Water Awareness Celebrations” in the state to

emphasize the need to protect and appreciate safe drinking water. Held in conjunction with National

Safe Drinking Water Week, the celebrations included drinking water taste tests and poster and coloring

contests to encourage awareness among students. News media provided coverage of the events and the

water system with the best tasting water competed nationally in Washington, D.C. Georgia contracted

with the Carl Vinson Institute of Government at the University of Georgia to establish communication

and coordination mechanisms among water programs, local government officials, and others involved in

water resource management. The result of the contract will be a watershed management guidebook.

X Enhancing drinking water websites

Websites can be very effective vehicles for disseminating information about drinking water programs to

water systems and the general public. Several states, including Kentucky, Florida, and Pennsylvania have

established websites to provide information on the DWSRF program. Kentucky’s website separates

information for the general public and information for professionals, including consulting engineers,

water system managers and operators, and researchers. The site includes information about the state’s

DWSRF program and detailed information on state regulations, certified labs, analytical methods,

drinking water treatment tips, and links to related sites. Florida’s website provides information about

the DWSRF program including a calendar of events, procedures for getting a loan, application

materials, and frequently asked questions.

Pennsylvania’s website provides information on the DWSRF program including set-aside workplans,

project priority lists, and links to a loan calculator which allows borrowers to compare DWSRF interest

rates with interest rates of other financing sources. It also has self assessment guides and budgeting

worksheets for different types of systems, including municipally-owned and mobile home park-owned

systems. A webpage for operators has also been created to provide information to operators. The

webpage includes a calculator for common process control calculations, an advertisement section to buy

or sell equipment and supplies, and a section to ask questions and exchange ideas or address problems

experienced by operators.
Chapter 10 — Set-Aside Activities Funded

73

X Informing local government and water system officials

States recognize that reaching and educating key decision makers such as local officials, water board

members, and system owners is essential for ensuring that systems have the resources to ensure adequate

capacity. Mississippi entered into a four year contract with the Mississippi State University Cooperative

Extension Service to provide coordination and material support needed to conduct technical training

sessions for board members and managers of small water systems in the state. Board members and

managers were given training on the legal, decision making, and system oversight responsibilities of their

positions, and the basic technical and managerial skills necessary to fulfill those responsibilities. The

state provided 1,800 participants with training at 67 separate training sessions. To address the fact that

more than half of the state’s population relies on ground water, North Carolina used funds to increase

public knowledge of the benefits of wellhead protection. One-day seminars on wellhead protection were

conducted across the state and training was provided to local community leaders on the importance of

wellhead protection and the methods available for use within wellhead protection plans.

▼ Supporting Drinking Water Programs

Many states have used set-aside funds to enhance their drinking water programs by hiring additional staff

to support their PWSS, operator certification, capacity development, and source water protection

programs, and by providing additional resources to implement new drinking water regulations. States

have also used funds to enhance their oversight of system compliance, improve their data systems, and

assist systems with preparing consumer confidence reports.

X Enhancing oversight of system compliance

As part of their primacy responsibilities, states are required to ensure that their systems comply with

national primary drinking water regulations and must have a program in place to conduct sanitary

surveys of their systems. The sanitary survey is a valuable tool for assessing the adequacy of a water

system in producing and distributing safe drinking water. Colorado used funds to increase the scope and

frequency of sanitary surveys, capacity development reviews, and investigation and response to incidents

of non-compliance. More than 200 system site visits have been made under a state noncommunity

drinking water system sanitary survey initiative using local health departments as part of the state’s

capacity development program.

This effort will eventually involve

annual sanitary surveys of

approximately 800

noncommunity ground water

systems. New Mexico developed a

Statewide Drinking Water

Assessment planning process to

identify and provide information

on the needs of the state’s public

water systems through sanitary

surveys and other sources of

information.

Supporting Drinking Water Programs

Challenges

• Implementing and complying with new

drinking water regulations

• Conducting adequate oversight of water

systems

• Maintaining drinking water data management

systems

Solutions

• Hire additional state staff to help implement new regulations

• Decentralize sanitary survey responsibilities and increase scope of

surveys

• Purchase or improve data management systems
DWSRF Report to Congress

74

Oregon used funds to contract with County Health Departments to help public water suppliers with

sanitary surveys, water quality problems, reporting, and regulatory consultation. Utah used funds to

continue to perform core functions of the PWSS program such as sanitary surveys, plan reviews, and

ground water source protection. The state also awarded $75,000 in grants to 12 local health

departments to conduct sanitary surveys.

X Improving state data systems

The Safe Drinking Water Information System (SDWIS), designed by EPA to help states run their

drinking water programs, houses three major categories of information: inventory, sampling, and

compliance monitoring data. States use SDWIS to help meet EPA quarterly reporting requirements and

increase efficiency. West Virginia used DWSRF set-aside funds to update the SDWIS data management

system. Information gathered through the program helps the state planning and policy team to manage

sanitary survey reports, follow-up on violation and enforcement actions, map information through the

use of geographical information system (GIS) tools, and interact with state, tribal, and local governments.

Other states, including Delaware, Maryland, and Virginia, have used set-aside funding to purchase or

improve SDWIS data management systems. Presently, Delaware is adopting the SDWIS program to

clean up current data and facilitate data migration. The state is generating electronic monitoring

schedules for systems to track violations and enforcement actions.

States are also using set-aside funds to develop data systems to track information for other parts of their

programs. Montana entered into a contract to create a GIS database of water system sources using

existing latitude/longitude information and to train PWSS staff in the use of Internet interactive mapping

applications. Pennsylvania is developing a networked data management system to support certification

activities such as testing and continuing education. Texas developed an integrated data applications

package to give the PWSS program the capacity to satisfy the data and tracking needs of both the state

and EPA. Massachusetts is developing a comprehensive GIS database of public water supply sources and

their protection areas, land use, and potential contaminant sources.

X Helping systems prepare consumer confidence reports

The SDWA Amendments require water systems to prepare annual consumer confidence reports (CCRs)

which provide consumers with information on their drinking water sources, the level of any contaminant

found in local drinking water, the likely source and potential health effect of any contaminant in the

local drinking water supply, and other consumer protection documentation. The consumer greatly

benefits from these reports, but many systems do not have the resources or personnel to complete the

required reports. To meet SDWA requirements and protect consumers, many states, including Arkansas

and Rhode Island, used set-aside funds to help systems complete the reports. Arkansas, in conjunction

with the Arkansas Rural Water Association, has provided extensive assistance to systems in completing

CCRs including the review and critique of drafts and reminders to systems regarding deadlines for

compliance. Rhode Island contracted with the New England Water Works Association and Maine

Rural Water to provide assistance to small systems in the areas of system operation and CCR preparation.
Chapter 10 — Set-Aside Activities Funded

75

▼ Promoting Source Water Protection

Taking positive steps to manage potential sources of contamination and prevent pollutants from reaching

sources of drinking water is often more efficient and cost-effective than treating drinking water later.

Each state has developed a comprehensive Source Water Assessment Program to assess the source of every

public water system within the state. The source water assessment results provide the information

necessary for water systems to seek help from states in protecting source water, or initiating local

government protection efforts. Many states are using set-asides to fund a variety of source water

protection measures including educational outreach programs, incentive-based programs for water

systems to create and improve source water protection areas, land acquisition and conservation easements,

and programs to ensure wellhead protection.

X Educating the public on the benefits of source water protection

Upon completion of source water assessment activities, the SDWA Amendments require all water systems

to demonstrate the condition of their water source to the public. States such as

Pennsylvania and California have

developed educational programs

for water systems and the public

on the importance of source water

protection and the funds available

to improve source water quality

through protection measures.

Pennsylvania’s program is

comprised of several elements.

The state has created a web page

to provide the public with

assessment schedules, summary

reports for completed assessments,

and general information on source

water protection. A grant

program supports source water protection projects throughout the state and information on the

application process and available funding is provided on the state web page. Grants provided to

communities assist local coalitions in community-based education efforts and help to promote

communication and networking activities. Information and training are provided through 10 to 12 local

coalitions annually. Other grant recipients focus on educating children through museum exhibits,

school materials on source water protection, and a “Hydro Mania” festival.

California also uses funds to promote source water protection education activities. Funds support

presentations to local and professional organizations on implementation of the source water protection

program. A technical and policy advisory committees for source water protection was also created. The

state’s website provides guidance for delineating and assessing source water protection areas, electronic

forms to complete assessments, results of completed assessments, and information on funding

opportunities.

Promoting Source Water Protection

Challenges

• Managing potential sources of contamination

• Gaining public support for source water

protection

Solutions

• Provide assistance for conservation easements or acquisition of

land

• Implement wellhead protection programs

• Promote protection through websites, schools, and communitybased activities
DWSRF Report to Congress

76

X Funding incentive-based programs for water systems to create and improve source water

protection areas

Several states, including Massachusetts, Texas, and California, are focusing protection efforts on

providing assistance to local communities and water systems to undertake local source water protection

initiatives. Such an approach emphasizes the implementation of local land use controls, ordinances, and

management measures. Massachusetts expanded a well-developed source water protection program by

instituting a technical assistance and land management grant program. Project funding is prioritized

based on need. Projects supported by these funds include: planning riparian buffer zones at agricultural

sites; addressing the management of existing protected lands and public access issues; designing pesticide

and chemical storage facilities; educating the public; coordinating and improving emergency response;

and developing a local surface water protection plan. The state supports the acquisition of land for

source water protection when deemed financially cost-effective.

Texas developed a loan program for systems to implement best management practices to protect their

drinking water sources. The types of projects eligible for funding include: land acquisition,

implementation of land use ordinances, hazardous waste collection programs, and public outreach

activities. California has reserved more than $8 million from its capitalization grants to support loans for

community water systems to implement measures to protect vulnerable drinking water sources from

contamination. The types of projects eligible for funding include: hazardous waste collection programs,

education on best management practices, closure of abandoned wells, and fencing out cattle from intakes,

tributaries, or reservoir boundaries.

X Acquiring land and conservation easements

Conservation tools such as land acquisition and conservation easements can protect a water supply by

preventing pollution-generating activities from occurring in critical areas, and can provide community

benefits such as preserving open space, enhancing recreational opportunities, and reducing flood damage.

Unlike purchasing the land through acquisition, a conservation easement is a legal agreement between a

landowner and a government agency that permanently protects the land by limiting the amount and

type of development that can take place while the landowner continues to own it. Several states,

including New Hampshire, Vermont, and Kentucky, have established loan programs for land acquisition

and conservation easements for source water protection.

New Hampshire provides loans to systems to purchase land or conservation easements to protect

vulnerable drinking water sources from contamination. Applications received by the state identified a

demand for more than $1.5 million in projects. A contract with the Society for the Protection of New

Hampshire’s Forests provides technical assistance to water systems in prioritizing projects for land

acquisition and facilitating purchases. New Hampshire identified protection of sources of drinking water

as a priority and budgeted $1.5 million in state grants as a 25 percent match to help communities

purchase land. Vermont established a program to provide loans to municipally-owned systems for the

purchase of land or conservation easements. The state has made a total of $200,000 in loans to 3

systems. One loan, to the Town of Bradford, purchased a tract of farmland within Zone I of the system’s

source protection area. The purchase was a high priority because the Town’s source protection plan

identified high risk land use activity on the property. Kentucky also established a loan program for land
Chapter 10 — Set-Aside Activities Funded

77

acquisition or conservation easements. The site must be within a delineated source water or wellhead

protection area and the acquisition must be consistent with approved county water supply plans. The

state made a $360,000 loan to a system to acquire 180 acres.

X Implementing wellhead protection programs

Nearly 80 percent of community water systems use ground water for their primary source of supply.

Wellhead protection promotes pollution prevention and management techniques to protect ground water

sources of drinking water. States such as Michigan, Maryland, and Illinois used funds to support the

proper abandonment of wells. Improperly decommissioned wells and treatment facilities provide a direct

conduit for contaminated surface water and treatment byproducts to enter ground water. Recognizing

these potential threats and developing measures to prevent them is an important part of any source

protection program.

Michigan developed and is implementing a statewide Abandoned Well Management Program with the

support of set-aside funding. The program helps water systems manage abandoned wells identified

inside delineated wellhead protection areas and in areas where municipal water service was extended into

areas previously served by on-site wells. The program combines a statewide education program with

demonstration projects to promote this new program. At least 210 improperly abandoned wells were

properly capped with the help of two full-time staff and two student assistants hired through DWSRF

set-aside funds. In addition, a state environmental bond program provides grant money (with a 25

percent local match requirement) to communities to locate and properly seal abandoned wells within

delineated wellhead protection areas.

Maryland implemented a wellhead protection program that provides grants to local communities to

support the creation of wellhead protection areas. Funds support the distribution of information to all

water suppliers and local government officials on the availability of DWSRF funding for source water

protection. Funds may be used to support technical analyses of wellhead areas including dye tracing,

estimation of areas contributing recharge to the ground water, and any approved method for establishing

a wellhead protection area. Illinois has established a well recharge area delineation program focused on

Illinois’ Priority Groundwater Protection Planning Regions. This program will delineate the five year

recharge areas for community water system wells which utilize unconfined aquifers within these regions.

With the help of several public universities, the information gained will be included in the Illinois EPA

Internet GIS database.
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Chapter 11 — Implementation Issues

79

11 Implementation Issues

Any new program of this magnitude can be expected to have its share of growing pains; and the DWSRF

program is no exception. States have faced, and continue to face, challenges which affect the

implementation of their programs. Some of these challenges affect the progress of their programs and

others impact their programmatic decisions. This chapter discusses some of the challenges that states

have encountered in implementing their programs and other obstacles and barriers they perceive as

affecting their programs. The chapter also discusses some of the issues and resolutions to these issues.

▼ Challenges Impacting Utilization of Funds

In reviewing the status of state DWSRF programs, EPA often refers to the rate of fund utilization or

“pace” of the program. Chapter 8 outlined several of the milestones associated with providing assistance

to recipients and completing projects. A program with good pace is deemed to be one that is efficient

and timely in providing assistance to recipients. The measure used to assess the utilization of funds is

the assistance that has been provided as a percent of the funds available. As was noted in Chapter 8,

while the national average for that measure through SFY 2001 was 72 percent, there were several states

that exhibited lower utilization rates. There is no one reason for slower pace in some states - the causes

are multiple and, in some cases, unique to each state.

States that had preexisting programs or were implementing the DWSRF through the same agency used

for the CWSRF program generally got off to a faster start because they had the administrative structure

in place to handle the funds and were comfortable operating a loan program. These states also benefitted

because, in working to obtain legislative authority, they typically only had to amend existing legislation

rather than introduce new bills. States that had to develop new programs and obtain new legislative

authority took longer to get moving. In fact, only 18 states received funding in the first year of

availability for their FFY 1997 grants, and 14 of those received funds in the final month of that fiscal

year (Table 3-1). Sixteen states received their first grant in the final month of availability for the funds

(September 1998).

Obtaining the state match needed to receive a grant was a significant issue for some states early on, even

though the law provided states with additional time to provide match for the FFY 1997 appropriation.

For a few states, the challenge of obtaining match has proven to be a continuing problem, which could

increase in light of recent state budget constraints. States that were unable to receive state appropriations

for match were forced to go to the bond market to issue bonds to provide match. In many cases, these

bond issues require voter authorization which can further slow progress in a state’s program. Rhode

Island and Louisiana have both faced serious problems in obtaining match, affecting their ability to

provide assistance since states are required to provide state funds proportionally with federal funds.

California and Maine are among the states that must obtain voter approval for bonds issued to provide
DWSRF Report to Congress

80

match. In California, the delay caused by issues associated with the match placed the state in danger of

losing its FFY 1997 funds.

Obtaining adequate staff to implement programs has been another challenge for some states. Staffing

problems have been caused by hiring freezes, internal reorganizations, and salary imbalances between the

state and private sector that make it difficult to hire qualified staff. Many of these challenges are statelevel problems that the federal government cannot fix. However, in a few instances, EPA has issued

letters to state leaders informing them of the Agency’s concerns about the state’s ability to manage the

program and the potential impact this would have on their ability to receive future federal grants. In

some cases, these actions have helped states understand and reduce state-level hurdles.

Another factor that has the potential to impact utilization of funds in all states is a natural outcome of a

program that focuses on the needs of smaller systems. Smaller systems frequently need more time and

assistance to identify what projects they need to complete and to prepare to receive assistance. In many

cases a system will rank high on a state’s priority list because it has a serious public health problem, but

the system has not done the planning and design work they need to complete before they can be

considered for a loan. Overcoming the challenges presented by smaller systems has required hard work

and creativity on the part of the states. States have put additional resources into working with smaller

systems and, as described in Chapter 10, have used their set-aside funds to help small systems prepare for

funding. As state capacity development programs continue to improve, and as more systems are aware of

the requirements associated with the DWSRF program, states should be able to move the smaller systems

toward funding more quickly.

When approaching a particular state that is exhibiting slower progress in using funds, it is important to

try to understand the root causes in order to determine potential solutions to problems. EPA will use

financial indicators developed using data from its data system as a starting point for investigation rather

than as a endpoint. For example, California’s utilization of funds through SFY 2001 stood at 28

percent, which is much lower than the national average of 72 percent. However, the figure represented a

large increase from the previous year’s value of 4 percent and it appears that the state is on track for

continuing improvement. In the final two months of SFY 2001, the state closed eight loans for $60

million, which represented 50 percent of the agreements and 66 percent of the funds provided in that

fiscal year. Upon investigation, there have been several contributing factors to the slower pace in the

state:

• The California Department of Health did not have a preexisting financial assistance program and had

to develop legislation for passage by the state’s General Assembly. The state received its FFY 1997

grant in September 1998 (the final month of availability).

• Although the program was able to secure match from the state’s general fund for the first two grants,

DWSRF staff had to spend considerable time and energy working on a multi-billion dollar bond

referendum which included match for future DWSRF grants. Passage of the bond issue in March

2000 gave the staff time to increase their focus on implementing the program.

• During the initial years of the program the state took the time to establish clear procedures so that it
Chapter 11 — Implementation Issues

81

would be able to more effectively run the program in the long-term.

• The state has focused its attention on smaller systems which require significant assistance to prepare

for funding.

An additional example is the State of Arkansas. Utilization of funds in the state increased slightly from

the SFY 2000 figure of 22 to 25 percent through SFY 2001. Upon investigation, two major causes were

identified, neither of which are in and of themselves serious problems or within the state’s control. The

state had entered into binding commitments with two projects which ranked number 2 and 3 on the

state’s first fundable list of projects. However, prior to receiving loans, both projects (totaling $24

million) were beset by legal problems. The state has worked to help mediate the disputes and was able

to close one of the loans and partially fund the other. The second factor affecting the state’s pace has

been, unexpectedly, its success in coordinating funding. Arkansas is a good example of a program that

coordinates funding with other state and federal sources of funds. A state Water/Wastewater Advisory

Committee meets monthly and reviews projects that have requested funding in order to identify the best

funding solution for each project. As a result, a substantial number of the initial projects on the state’s

priority list were financed with other sources of funding. In the initial years of this state’s program, as

systems are preparing to proceed with DWSRF loans, projects identified through the DWSRF process

are getting funded and important public health protection is taking place.

With respect to the set-asides, there have been three primary challenges impacting states in utilizing

funds that have been reserved—staffing, contracting, and competing priorities. The August 2000 GAO

report, Drinking Water: Spending Constraints Could Affect States’ Ability to Implement Increasing Program

Requirements (GAO/RCED-00-199) discussed how states have been impacted by low authorized state

staffing and funding levels, hiring freezes, and inadequate salaries. Some states reserved funds and then

found they could not hire the staff needed to implement activities. States that could not hire looked to

contracting as a solution, but often found road blocks in the procurement process or ceilings on contract

use of funds. Finally, in addition to new drinking water rules, the 1996 SDWA Amendments

introduced several new programs and requirements in the areas of source water protection, capacity

development, and operator certification. States have spent the last three years working to complete

strategies and receive approval for programmatic changes. Now that states have approval for source water

assessment plans, capacity development strategies, and operator certification programs, it is anticipated

that expenditures of the set-asides will continue to increase.

▼ Challenges Related to Federal Requirements

Challenges that states face are not only the product of state issues or the character of the recipients of

assistance in the program. Many of the challenges that have affected pace in the program are the product

of federal requirements. There are a number of federal laws and regulations that apply to recipients and

sub-recipients of federal assistance (i.e., cross-cutters). These include requirements relating to the

conduct of environmental reviews, utilization of disadvantaged businesses, and historical preservation.

There are also conflicting requirements that create obstacles to efficient coordination of funding among

different federal agencies. For example, when pursuing coordinated funding opportunities, states have

experienced frustration at differing federal agency requirements pertaining to the conduct of

environmental reviews.
DWSRF Report to Congress

82

Because there are many conditions attached to the receipt of federal funds, states face challenges in

working to help recipients of assistance understand all of the requirements to which they are subject,

especially small and/or privately-owned systems which often do not have the option of using the

municipal market or other affordable sources of financing. States have reported that the most challenging

cross-cutters to implement have been the provisions governing the participation of disadvantaged

business enterprises (minority and women), environmental reviews, and historic preservation.

▼ Issues Related to State Program Decisions

In the discussion on stewardship in Chapter 8, it was noted that, in implementing their programs, states

must make decisions on how to direct funds and structure programs in a manner that addresses their

highest priority needs and ensures longevity of the Fund. These goals can compete against one another,

particularly in determining how much of the funding to direct to set-asides and how much assistance,

and what type of assistance, to provide to disadvantaged communities. EPA, in guidance and

regulations, has left the decision as to how states split their grants between funding set-asides to carry out

priority drinking water program activities and capitalizing their Fund to support loans to water systems.

Usually, decisions on how to distribute funds between the Fund and the set-asides are made at the state

drinking water program level based on a consideration of the immediate need for funding for projects

that are ready to proceed in the coming year, the long-term goal for fund capitalization for the state, and

the activities that need to be implemented through the set-asides. The amount of funds reserved from

year to year will vary in accordance with the projected funding needs. Nationally, states have reserved

approximately 16 percent of their grants for set-aside activities. On a state by state basis, the figure

ranges from 6.7 to 31 percent. In some instances, states have reserved an excess of funds for the set-asides

and found that they are not able to expeditiously expend them. EPA has encouraged several states to

transfer excess funds to the Fund to provide infrastructure assistance. On the other hand, the 2000

GAO report referred to in the previous section discussed the concerns of several states with respect to the

political difficulties in using funds for set-asides when the acknowledged infrastructure needs are so great.

This tension is more acute in states where more than one agency is implementing the program. In these

states, there are often conflicts between the drinking water program and the financial agency overseeing

implementation of the Fund in determining how much of the funding goes to projects as opposed to setasides. In some cases the pressure comes from higher levels of the state government. In at least one state,

the state’s budget agency dictates how much of the set-asides the state program can access. An

additional factor that has impacted state use of set-asides is an inability to take funds for the state

program management set-aside because a state cannot provide the additional matching funds required to

access the set-aside.

In addition to tensions between the Fund and the set-asides, EPA has also observed tensions between the

set-asides and other sources of state funding. In some cases, states have decreased the amount of funding

they provide for their drinking water programs and replaced the funds with the set-aside funds. This

causes concern for state drinking water administrators because they cannot be assured that the set-aside

funds will be available in the long-term since they are tied to capitalization grants. Other states have

been reluctant to take set-asides because they are afraid that their own state funding will be cut or that

EPA will make a decision to decrease funding for the traditional PWSS grant program.
Chapter 11 — Implementation Issues

83

A second programmatic issue that is restricted to management of the Fund is the subject of

disadvantaged assistance. Although the DWSRF program offers significant savings through its low

interest loans, there are systems that will still find it difficult to receive loans and keep rates affordable for

their customers. Only 16 of the 29 states with disadvantaged assistance programs provided principal

forgiveness. Most states that do not provide disadvantaged assistance in the form of principal forgiveness

have indicated that their reluctance is due to the fact that the assistance will, by its nature, reduce the

amount of funding available for assistance in the long-term as forgiven principal will not return to the

revolving Fund. States have been more amenable to providing longer term loans of up to 30 years and

interest rates that are greater than zero but less than the standard interest rate for non-disadvantaged

loans. Many states believe that the low interest loans offered through the program are sufficient in

addressing disadvantaged needs based on a financial assessment of the applicant. Some states are using

other federal or state funding programs to provide grant assistance to systems that have an identified

need, and in some cases, coordinate that funding with DWSRF funding.

EPA has not developed an estimate of the percentage of systems in the country that serve disadvantaged

communities. In its January 2002 report, Drinking Water: Key Aspects of EPA’s Revolving Fund Program

need to be Strengthened (GAO-02-135), GAO surveyed states in an attempt to develop a national estimate

of the number of disadvantaged communities using an individual state’s definition of disadvantaged or a

system’s rates as a percent of its median household income. GAO estimated that about 28 percent of the

24,334 small systems reflected in the results of their survey qualified as disadvantaged. However, GAO

did not have confidence in the precision of their estimate because some states lacked information to

report and there were issues associated with the sampling strategy. In response to new regulations such

as the revised arsenic standard, there has been a call for new grant programs targeted at small systems.

States may need to reassess their use of the disadvantaged assistance provision to determine if they are

missing systems that are not participating in the program due to lack of subsidy.

▼ National Program Issues

EPA established a partnership with the states to address the problems and issues associated with the new

program and to identify acceptable solutions. One of the first major issues faced by the program was

related to identifying the types of projects that would be eligible or ineligible for DWSRF assistance.

The law indicated that projects of a “type or category which the Administrator has determined ... will

facilitate compliance with the national primary drinking water regulations applicable to the system under

section 1412 or otherwise significantly further the health protection objectives of the Act’’ would be

eligible for assistance through the program. In developing the initial guidelines for the program, EPA

also considered the required criteria of section 1452(b)(3)(A) of the SDWA to focus on projects needed

to address the most serious risk to human health, to ensure that the nation’s drinking water is safe

through compliance with the national primary drinking water regulations, and to assist those systems

with the greatest economic need. The Agency determined that the purposes of certain types of projects,

including the construction and rehabilitation of dams and reservoirs and purchase of water rights, were

focused less on water quality and more on satisfying demand for drinking water. The Agency believed

that providing DWSRF program assistance for these types of projects would not further the objectives

Congress set out in the SDWA to the same extent as the other projects identified as eligible. EPA

maintained these restrictions in its final regulation for the program.
DWSRF Report to Congress

84

The second major issue facing the program was associated with identifying and prioritizing projects for

funding. The law required that states give priority to projects that meet the criteria in section

1452(b)(3)(A) of the law (see above). EPA reviewed the priority systems for all 51 programs to ensure

that they met the Congressional intent of the law. In some states, there were intense discussions relating

to the types of factors and relative weights assigned to them within the systems. States were concerned

that through the review process, EPA was attempting to force a cookie-cutter approach that would have

all state priority systems looking the same. EPA provided a compendium of the state priority systems in

a report released in February 1999, Prioritizing Drinking Water Needs: A compilation of State priority

systems for the Drinking Water State Revolving Fund Program (EPA 816-R-99-001). A review of the

priority systems demonstrates that, while all states had to address the three primary factors identified in

the law, the structure of, and additional factors included within, the states’ systems vary considerably.

The law requires that states provide assistance to those systems with the highest priority on a fundable

list of projects. This was a departure from the CWSRF program, which allows states to fund any projects

on the priority list regardless of order (although most states try to fund the highest priority projects).

Early on there was some concern and misunderstanding about the consideration of a project’s readiness

to proceed with respect to offering assistance. For the first two years only, EPA allowed readiness to be

considered as a factor in the priority system. After the initial two years, states could not include

readiness as a priority ranking factor because it would provide a misleading portrait of the projects with

the highest public health and compliance needs. Many states therefore thought that readiness to

proceed could no longer be considered in funding decisions and that they would have to hold funding

for a highly ranked project until it was ready for construction. However, EPA believes that states now

understand that a project’s readiness to proceed must be considered as the state develops its fundable list

of projects from the comprehensive list of projects that have expressed interest in funding (Figure 11-1).

A state would not want to place a project with a high public health need at the top of its list of projects

that will receive funding in

the next year if the project

will not be ready to proceed

for three years.

Two issues which states

identified as concerns were

discussed and resolved using

the assistance of the State/

EPA SRF work group. This

work group consists of 18

representatives from state

DWSRF, CWSRF, and

finance agencies; and staff

from EPA’s headquarters and

ten regional offices. The

group was convened in

February 1998 and has met

ten times since then to

Figure 11-1 DWSRF Identification of Fundable Projects

Proceed down list from

highest to lowest priority

YES

NO

Comprehensive List of

all ranked projects with

expected funding schedule

Fundable List of

projects ready to proceed

Will system be ready to

proceed in this funding cycle?

What technical

assistance can we

provide to help

the system get

ready?
Chapter 11 — Implementation Issues

85

discuss issues related to the two SRF programs. Early in the program, states received inquiries from

homeowners served by private wells that had become contaminated about the possibility of their

receiving assistance to remedy the problem. States had also heard from water utilities that were

interested in consolidating into a regional water authority. In both scenarios, the applicants were seeking

assistance to create a new public water system. Because the language in SDWA requires that assistance

only be provided to a public water system, neither of these scenarios could be funded. EPA recognized

that there could be important public health benefits and affordability issues that could be addressed

through these types of projects and that allowing such projects would fall within the scope of the SDWA

goals. The Agency worked with the work group to craft a policy that would allow these types of projects

to be funded, but which would also include measures to ensure that the policy would not be abused.

After seeking comment, a policy was approved through the Federal Register in 1998 (63 FR 59299) and

was later incorporated into the final regulations for the program.

The second issue related to the timing of assistance for projects and whether such assistance would be

considered refinancing. The law precludes states from refinancing projects for privately-owned systems.

Some state programs were concerned that this restriction, read strictly, would preclude them from

funding privately-owned systems under the state’s funding schedule. For some states that issue bonds,

all loans are closed at one or two times during the year. Because the state does not want to delay a

project from proceeding prior to execution of the loan agreement, these states will typically allow the

project to proceed and agree to reimburse the recipient for costs incurred between the time that the

project was approved and the loan executed. Other states with short construction seasons, such as

Alaska, also wanted the ability to reimburse a project for approved costs incurred prior to the execution of

the loan. If a system, particularly a private system, was to fund any interim costs using debt, this meant

that the state could not provide reimbursement of funds since it could be construed as refinancing.

After soliciting public comment, EPA released a policy in 1999 (64 FR 1802), later incorporated into

the regulations, stating that a project (for a privately-owned or publicly-owned system) that had been

given approval, authorization to proceed, or any similar action by the state prior to initiation of

construction would be eligible for reimbursement for construction costs incurred after such state action,

provided that the project met all of the requirements of the DWSRF program and other criteria.

Planning and design and associated pre-project costs were eligible for reimbursement regardless of when

the costs were incurred.

A final, and on-going, controversy concerns state restrictions on funding privately-owned systems. The

SDWA, unlike the CWA, explicitly allowed for the provision of assistance to privately-owned systems

through the DWSRF program. This is particularly relevant since roughly one-half of the systems in the

country are privately-owned and typically small. Several states have explicit restrictions against providing

funding to privately-owned enterprises on a policy, statutory or regulatory basis. Presently, 12 states

restrict the provision of DWSRF monies to privately-owned systems (Figure 7-4).

EPA had been asked by some stakeholders to consider changes to the allotment method to account for

restrictions in the states that restrict privately-owned systems from receiving DWSRF assistance.

Stakeholders expressed the opinion that the allocation for these states should only consider the total need

associated with water systems that are eligible to receive DWSRF monies from the state (i.e., publicly-
DWSRF Report to Congress

86

owned systems). They proposed that capital needs associated with privately-owned water systems be

deducted from these states’ total need estimates, although, as required by the SDWA, each state (even

those restricting privately-owned water systems from funding) would receive at least one percent of the

funds available to states.

EPA reviewed the statutory language and determined that allotments should be based on the needs

reported in the most recent needs survey which must assess “capital improvement needs of all eligible

public water systems.” The total state need collected through the survey represents the needs associated

with systems eligible for assistance under the law (i.e., publicly- and privately-owned community water

systems and non-profit noncommunity water systems). Therefore, these needs must be included in

determining the allotment of funds.

Since the program began, several states with such funding restrictions have made changes to legislation to

allow funding to privately-owned systems. Others have worked to identify alternative methods of

providing assistance, have used set-aside funds to provide technical assistance, or are helping privatelyowned systems obtain assistance from other state or federal sources. However, EPA has also found that

some states with the authority to provide assistance to privately-owned systems have not done so. The

Agency has been concerned that an attempt to remedy inequities through the allotment method might

itself lead to inequities by penalizing states which have specific restrictions and not penalizing states that

have no restrictions but do not fund private systems. EPA will continue to monitor states with respect to

their decisions to fund privately-owned systems to ensure that the program maximizes benefits to public

health. EPA will also continue to work to assist states in working with privately-owned systems by

providing financial management training on the mechanics of applicant credit evaluation and facilitating

the dissemination of information between states.

There have been additional issues that have been raised throughout implementation of the program, and

issues will continue to be raised as the program moves into the future. EPA’s goal is to work with the

states to identify mutually agreeable solutions to issues that may arise.
Chapter 11 — Implementation Issues

87

Public Outreach and the DWSRF program

One of the primary goals of the 1996 SDWA Amendments was to provide better information to the

public on the quality of their drinking water. The law emphasized public participation and consumer

right-to-know to ensure that states’ choices concerning drinking water program implementation are

responsive to public needs. Several provisions in the law specified that the public be given the

opportunity to review and comment on program implementation in an effort to increase public

awareness. For the DWSRF program, the law requires that a state release its Intended Use Plan,

which provides information on how the state will use its program to fund infrastructure projects and

other programs for the protection of drinking water and public health, to the public for review.

States have used a variety of methods to reach the public—including traditional mailing, the media,

and the Internet. Effective public outreach not only serves to increase public awareness - an

effective campaign that reaches all interested parties, including public health and environmental

groups, will also market the program to potential customers for the program. In April 2000, EPA

released a report, Case Studies in DWSRF Implementation — Public Participation (EPA 816-R-00-001),

which reported on how several states were reaching out to include the public in developing their

DWSRF programs and marketing the program to potential borrowers.

The success of states in reaching the public has been mixed. Some states have been able to

successfully bring the public into the process while others have been disappointed that their efforts

have not yielded greater interest on the part of the public. An example of a successful effort to

market and promote the program comes from the State of Arizona. To highlight the importance of the

DWSRF in protecting the citizens of the state, the state Water Infrastructure Finance Authority annually

identifies a project of the year. A past winner was the Far West Water & Sewer, Inc., a private utility

that serves a population of 20,000 in an area 10 miles east of the City of Yuma. The $6 million

project, funded at a 6% interest rate, solved a significant water quality problem by constructing a

pumping plant and pipeline to transport water from the Yuma-Mesa Canal to a new “package”

surface water treatment plant. The project acquired, pumped, treated, and distributed Colorado

River water flowing in the Canal to supplement and blend with poor quality water from existing

sources of ground water wells. The project enabled the owners to transfer their water source from a

poor quality ground water source to treatment of a better quality surface water source.
DWSRF Report to Congress

88

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12 Future of the DWSRF

Entering its sixth year of implementation, the DWSRF program is viewed as a success by both states and

EPA, although all acknowledge that the program continues to be a work in progress. EPA and states

have heard criticisms that the program has not moved as quickly towards full implementation as its sister

CWSRF program had. While the DWSRF program has been fortunate to build on the experiences of the

successful CWSRF program, it has suffered misconceptions due to comparison with a more mature

program. In fact, a review of the data for both programs shows that the DWSRF program is actually well

in line with progress shown by the CWSRF program at the same time in its development. Should

appropriations continue beyond the 2003 authorization, EPA and states expect similar success for the

DWSRF over the long-term.

Some of the greatest assets of

the program are the elements

that differ from those of the

CWSRF program. Congress

structured the DWSRF

program to touch on all aspects

of drinking water protection -

not just infrastructure (Figure

12-1). While the flexibility to

use funds for other purposes

can present challenges for

states in decision-making, EPA

believes that states have found

the flexibility of the set-asides

and disadvantaged assistance to

be of great utility in ensuring

that their citizens have safe and

affordable drinking water.

States are using the DWSRF to

fund their highest priority

infrastructure projects and the

program is successfully

integrating with other

objectives of the 1996 SDWA

Amendments. States are using

funds to implement new

Preventing

contamination

of source water

Drinking water

program rule

implementation

Financing

infrastructure

improvements

Improving water

system management

& operations

DWSRF

Figure 12-1 DWSRF Support of the Mission to Ensure Safe Drinking Water

89
DWSRF Report to Congress

90

The Providence water treatment plant supplies 60 percent of

Rhode Island residents—over 600,000 people—with safe and

reliable drinking water. In November 1999, an inspection of

their 90-inch concrete aqueduct revealed severe corrosion and

deterioration. The aqueduct, built in the 1920’s, was the

main water conduit from the water treatment plant to the

distribution system. Though an alternate line was built in

the1960’s, it did not provide true redundancy because there

was no shut-off mechanism to prevent water from passing

through the 90-inch aqueduct. If there was a failure in the

line, there would be no way to isolate the 90-inch aqueduct,

resulting in a complete loss of service to the entire water

system.

Providence secured a $5 million DWSRF loan to install a

temporary 90-inch plug to take the aqueduct offline and

make the necessary improvements. With the temporary plug

in place, repairs to the aging concrete were completed, the

entire 4.5 miles of pipeline was inspected, and a new butterfly

valve and valve structure were installed. The new valve gives

the system the capability to isolate the aqueduct in the future.

This first phase was completed in May 2001, and repairs to

the remaining miles of pipe were scheduled for the following

winter.

Addressing Aging Systems in Rhode Island

Rhode Island

programs related to source water protection and operator certification. The program is focusing on

assisting small systems through both the Fund and the set-asides. Perhaps the most effective crossfertilization has occurred in the area of capacity development. Several states are integrating their DWSRF

and capacity development programs to ensure better sustainability of system operations in the long-term.

There are still a few states that are facing challenges in implementing their programs. While EPA is

committed to working with these states to help them overcome obstacles, the Agency will also monitor

states for compliance to determine if it would be appropriate to withhold funding for redistribution to

states with efficient programs.

This final chapter addresses programmatic challenges that are faced by systems and local, state, and

federal governments and how they can be addressed through the DWSRF program as it is currently

structured. The chapter also discusses other challenges that may require Congressional consideration to

identify solutions. Finally, several principles are identified that should guide the efforts of federal, state,

and local governments as they work to ensure protection of public health and drinking water.

▼ Challenges on the Horizon

X Meeting drinking water infrastructure needs

Over the past two years, there has been much discussion of the great needs facing the drinking water

industry over the next several decades. Other reports have been released that promote drinking water

needs in excess of EPA's 20 year estimate of

$151 billion. EPA has developed a report

on the potential gap that exists between

what systems currently spend and will

need to spend in the future to meet those

needs. The predicted gap varies

considerably depending on the

combination of assumptions used in the

analysis. The analysis found that a

significant funding gap could develop if the

nation's clean water and drinking water

systems maintain current spending and

operations practices. However, this

funding gap is not inevitable. For example,

the gap largely disappears if municipalities

increase clean water and drinking water

revenue and associated spending at a real

rate of 3 percent per year (above the rate of

inflation) – a growth rate that is consistent

with the long-term growth estimates of the

economy. Over the next few years, EPA

will be working with its stakeholder

partners in all levels of government and
Chapter 12 — Future of the DWSRF

91

utilities to address the challenges presented by the gap and to identify the appropriate share and type of

local, state, and federal and private funding sources needed to meet future infrastructure needs.

In working through these issues, one of the primary considerations will be how to address issues of

affordability associated with those segments of the population with low incomes. Although the federal

government cannot be responsible for meeting the entire cost of providing safe water, it can share in

meeting the burden where new drinking water standards disproportionately impact small communities.

In the past two years, several Congressional bills were introduced that would develop new grant programs

to address small and disadvantaged systems. While the intent behind the bills - to target funding to the

neediest systems - may be appropriate, creating new grant programs may not be the best way to address

the problem. The DWSRF program provides an existing administrative infrastructure for financing

drinking water system improvements, operated by states, who best know and understand the systems

that require assistance. State DWSRF programs already have the ability to provide subsidies (i.e.,

principal forgiveness) to recipients and would likely increase use of the provision if additional funds were

made available through the program. Additionally, many state DWSRF programs have expressed

concerns that new grant programs would negatively impact the ability of state DWSRF programs to

make loans because systems will wait for grants rather than apply for loans, even if loans are an affordable

option.

X Ensuring sustainability

One of the most significant objectives of EPA’s drinking water program is to see that all drinking water

systems are sustainable. As discussed earlier in the report, the diversity of water systems is considerable,

and many systems do not have the customer base or rate structure to be sustainable. The water industry

as a whole should work towards sustainability using several different tools including rate structuring,

more affordable technology, restructuring, privatization, and managerial or physical consolidation of

systems.

One practice that has taken hold within the utility sector is asset management. By developing a

comprehensive strategic plan and ensuring that sufficient funds are allocated over the life of an asset, a

water system can potentially improve the process for building, maintaining, and renewing infrastructure.

Over the next several years, new standards developed by the Governmental Accounting Standards Board

will require that local governments revise their financial statement presentation in order to meet generally

accepted accounting principles for governmental financial statements. Modifications include showing

the depreciation of capital assets or a modified approach that would include an accounting of the value

and condition of infrastructure assets. This requirement should continue to move publicly-owned water

systems forward in managing their assets in a comprehensive and business-like fashion.

The DWSRF program can support many of the tools that can be used to enhance sustainability. An

assistance recipient must undergo an assessment of their technical, financial, and managerial capacity

before they can receive assistance. Most states will look at the rate structures of the system with an eye

towards ensuring that the loan will be able to be repaid. Other states take a closer look at the rates and

encourage systems to make changes that will ensure that they have adequate revenue in the future to

maintain their infrastructure and make other needed improvements. For some private systems subject to

Public Service Commission rate review, the DWSRF program has proven to be the avenue by which they
DWSRF Report to Congress

92

have justified rate increases to sustainable levels. States can take a closer look at the rate structures of the

systems to which they provide assistance to ensure that rates are adequate and affordable to those with

the greatest needs. The capacity review that states do on recipients also can touch on aspects related to

asset management. A state could require that a system develop or update a plan outlining how it intends

to manage its assets in order to show that it has adequate managerial capacity. States could also provide

incentives to systems for enacting and maintaining asset management practices by providing them bonus

priority points or additional subsidies if a system maintains proper asset management practices over the

term of the loan (e.g., reduce the interest rate by a set number of basis points at years 5, 10, and 15 as a

reward).

X Ensuring security of systems

The terrorist attacks of September 11, 2001 focused public attention on security issues related to public

infrastructure. While water systems have always had to monitor their facilities to ensure that they are

safe from vandalism, most have not conducted detailed assessments of their vulnerability to terrorist

attack. State DWSRF programs can be used as a vehicle to ensure that systems have done sufficient

security planning. For example, in order to demonstrate technical capacity, states could require that a

system have a vulnerability assessment or current emergency operation plan in place as condition of

assistance. States can look to the DWSRF to provide assistance for conducting vulnerability assessments

and implementing infrastructure-related security measures. The DWSRF program can fund vulnerability

assessments through the Fund or set-asides related to capacity development and technical assistance. Setasides can also be used to help systems update emergency response plans. Remedial actions identified

through assessments are also largely eligible for assistance where the action is a project that would

otherwise be eligible under the Fund. For example, a system might identify that it needs to change its

treatment process to ensure enhanced protection or it might determine that it needs to enclose its

wellhead within a building to increase security.

X Addressing water quantity

Water supply is a critical consideration for

any local government leader since

diminished supply will directly impact

the economic health of the community.

Many areas in the nation are experiencing

pressures arising from population growth

and persistent drought conditions.

Because the DWSRF program was

developed to address public health and

compliance with the SDWA, water

quantity is not a priority for the program

and many water quantity projects are not

eligible for funding. Ensuring adequate

quantity is a state and local, not a federal,

responsibility. Congress explicitly

disallowed DWSRF funding to be used

for projects where the need was primarily

The City of Cape May is a summer resort area located on the

southern tip of New Jersey. The aquifer that supplied the city

with drinking water was experiencing salt water intrusion and

had insufficient long-term capacity. The aquifer was used by

more communities than it could support, especially in the

summer time. Cape May wanted to drill deeper to ensure

adequate supply for its 12,880 residents. They installed an 840

foot deep well with a pump rate of 1,000 gallons per minute.

Due to the high salinity of the water, the construction of a 1

million gallon per day reverse osmosis desalination water

treatment plant was also required. The total project cost was

$1.6 million, of which $1.35 million was funded with a

DWSRF loan. The city also received funds from the U.S.

Department of Agriculture. Since operation of the new plant

began in October 1998, Cape May has had an adequate source

of safe drinking water and should well into the future.

Improving System Capacity in New Jersey

New Jersey
Chapter 12 — Future of the DWSRF

93

due to growth. While EPA cannot fund water quantity projects, it can address water quantity through

water conservation. Many states are exercising the provision in section 1455 of the SDWA that allows

states to require recipients of assistance to develop a water conservation plan as a condition of assistance.

All states should look towards incorporating such plans into their program requirements. The DWSRF

program can also fund many types of projects that would promote water conservation or reuse. Such

projects could include (but are not limited to) installation of water meters, development of water

conservation plans (through the set-asides), and installation of dual pipe distribution systems (potable

and non-potable) as a means to lower the cost of treating water to potable standards. However, because

the law specifically restricted use of funds to address growth as a primary purpose of a project, the intent

of the program does not include increasing water quantity for household use or any other purpose.

The CWSRF program can also be used to fund many other types of water reuse and conservation projects

that address the ability of wastewater treatment plants to properly meet the environmental goals of a

community efficiently and at a minimum cost. The types of projects that can be funded include

plumbing fixture retrofits and replacements (located in public buildings), use of efficient landscape

irrigation equipment, recycling gray water in public

buildings, and reusing wastewater.

X Coordinating the CWSRF and DWSRF

In implementing the Clean Water and Safe Drinking

Water Acts, federal, state and local governments often

encounter barriers and disconnects that can hinder effective

management of water programs. While EPA continues to

work to identify and promote connections between the two

Acts, the SRF programs provide an example of how

programs authorized under one Act can help support the

goals of the other Act. In EPA, the DWSRF and CWSRF

programs work closely together. In many states, the two

programs are implemented out of the same agency.

However, in other states, where the drinking water

program resides in a health-related department rather than

an environment department which typically oversees water

quality, state agencies are challenged to work together.

EPA has promoted use of the CWSRF program as a tool to

address many types of problems that can negatively impact

drinking water quality, such as methyl-t-butyl ether

(MTBE) contamination, poorly managed septic systems,

and ground water contamination by shallow underground

wells used for the injection of waste. EPA has also

promoted use of the CWSRF for the purchase of land and

conservation easements to help protect sources of drinking

water. Several states, including New York and New Jersey,

have provided significant amounts of loan assistance that

The cities of New London and Spicer, as well

as the Green Lake recreational area, are

located in Kandiyohe County in central

Minnesota. In the late 1990’s, the area

experienced several related drinking water

and wastewater problems. Many households

on Green Lake were served by private wells

that were susceptible to contamination from

failing sewage systems. The drinking water

storage available in the two cities could not

keep pace with the growing need, and New

London had Coliform contamination. To

solve these varied problems, a proposal was

developed to combine systems into the

Green Lake Sanitary Sewer and Water

District. This combined wastewater and

drinking water project relied on a $6.5

million DWSRF loan in addition to funding

from other sources (such as the CWSRF, the

wastewater infrastructure fund, and County

State Aid Highways bonds) to finance the

$23 million project. The drinking water

project, begun in 1999 and completed in

mid-November 2001, consisted of constructing a new treatment plant, drilling four

new wells, installing three new water towers,

and putting in miles of water mains to serve

1,529 households.

Combined Drinking Water and

Wastewater Project in

Minnesota

Minnesota
DWSRF Report to Congress

94

have helped to protect source water. Loans made from under the nonpoint source authority of the

CWSRF program can have a dual benefit. If a farmer takes out a loan to implement best management

practices that will reduce fertilization in order to reduce pollutant loadings to local water bodies, a

secondary benefit may be that ground water used as a source of drinking water will experience decreases

in nitrate, which can pose a serious risk to children. Both the water quality and drinking water programs

benefit from such cooperation.

▼ Challenges for Congressional Consideration

While many of the issues above could potentially involve Congressional actions, there are several

identifiable issues that have been raised by states that Congress could look to address in the short-term.

Some of these issues are related to DWSRF program implementation, some are tangential to the DWSRF

but important nonetheless for drinking water financing.

X Extending the authority to transfer between the SRFs

In the 1996 SDWA Amendments, Congress authorized states to transfer up to 33 percent of their

DWSRF grant to the CWSRF program, or an equivalent amount from the CWSRF to the DWSRF

program. The Act included a sunset provision on September 30, 2001. Congress extended the provision

for one year through EPA’s FFY 2002 appropriation, and an extension through FFY 2003 is proposed in

the President’s Budget. States have indicated that they would like to see the provision extended

permanently. Several states have used the provision to their advantage to address high priority public

health needs. Others who would be interested in pursuing transfers have been reluctant due to the

presence of a sunset date. A lending SRF wants to be assured that it will be able to recapture the funds

in the future should circumstances require it.

X Increasing funds for administration of the DWSRF program

Many states have expressed that an amount equal to four percent of the allotment is insufficient for

administering the program. This is especially the case where multiple agencies implement the program

and must share the funds, and, more importantly, in those states that issue bonds to increase the number

of projects they can fund. In some cases, the proceeds from bonds can create a four-fold increase in

available funds and the four percent can prove to be insufficient to meet the costs to oversee so many

projects. In the CWSRF program, states are confronted with a minimal amount of funds with which to

administer an ever-growing portfolio of loans as repayments begin to stream into the program. Many

states have elected to impose fees on borrowers, which has the effect of increasing costs for the borrower

or diminishing returns to the Funds. Because this is not a preferable solution, states should pursue an

appropriate solution that will provide them with sufficient funding to administer the program now and

into the future when capitalization ends.

X Providing relief from federal requirements

States have indicated that compliance with federal cross-cutters has hampered their ability to provide

assistance to small systems. Many small systems do not have the expertise to understand these

complicated requirements and other systems have determined that the costs of compliance exceed the

value of subsidies offered through the program. EPA will continue to work with other federal agencies

and internally to identify workable solutions in achieving compliance with these cross-cutting federal

requirements. However, flexibility to provide relief to some classes of borrowers (e.g., small and/or

disadvantaged applicants) could be useful.
Chapter 12 — Future of the DWSRF

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X Modifications to tax law

States have raised two issues related to tax law that they indicate negatively impact state DWSRF

programs that issue bonds. These issues also impact the CWSRF program and could also be an issue for

other environmental assistance programs. They relate to provisions of the Internal Revenue Code rather

than the SDWA. The first issue concerns arbitrage. Some states that have issued tax-exempt bonds in

connection with DWSRF and CWSRF programs use amounts as reserve accounts to secure repayment of

the bonds. If proceeds of tax-exempt bonds issued by state and local governments are invested in

securities that pay a higher yield than the yield on the bonds, the profit made on the invested bond

proceeds generally must be rebated to the U.S. Treasury. Without this rule, state and local governments

could issue tax-exempt bonds solely for the purpose of gaining arbitrage profits at the expense of greater

revenue losses to the federal government and ultimately higher interest rates on bonds whose proceeds

actually are used for the acquisition or construction of public property. States have urged that amounts

used as reserves to secure bonds for DWSRF and CWSRF projects be exempted from the arbitrage rebate

rules so that any interest earnings could be used for additional investment in water and wastewater

infrastructure projects. The Council of Infrastructure Financing Authorities, which represents many

state SRF financing agencies, has estimated that, if arbitrage restrictions were lifted, SRFs could earn an

additional $100 to $200 million annually on their funds. If these earnings were used as reserves to

secure additional bonds they would provide an additional $200 to $400 million annual investment in

water and wastewater infrastructure projects. Treasury officials suggest that greater programmatic

benefits would be achieved if instead states used a small portion of those bond proceeds for other forms of

credit enhancement, such as bond insurance, and used the bulk of the proceeds for additional loans to

finance needed infrastructure.

A second issue raised by state programs concerns private-activity bonds. Unlike the wastewater treatment

universe, the drinking water system universe includes a significant number of privately-owned systems.

Any tax-exempt bonds issued by a state DWSRF program under arrangements whereby the proceeds are

used by privately-owned systems generally must receive an allocation of issuance authority under a state's

private activity bond volume cap. States allocate their volume caps based on the priority they attach to

competing allowable uses of private activity bonds, all of which should serve some public purpose. States

and other stakeholders have suggested tax law modifications that would allow bonds for water

infrastructure projects funded through SRF programs to be issued without regard to the cap because the

activities serve a public benefit. However, if use of tax-exempt bond proceeds by private companies can

make critical progress toward DWSRF program goals, proponents of the financing should be able to

make persuasive claims on a state volume cap.

X State set-asides

The flexibility afforded to states to use a portion of their grants to support other drinking water programs

has proven to be an effective tool in drinking water protection. However, slight modifications to the setasides could help them to be even more effective. First, many states have not been able to use the state

program management set-aside because they cannot provide the dollar for dollar match required by the

law, which is above and beyond the 20 percent matching requirement on the entire grant. This set-aside

category includes important state activities that support drinking water rule implementation, source

water protection, and capacity development. The match was added to discourage states from backsliding. However, requiring the match has not stopped states from cutting their programs in light of
DWSRF Report to Congress

96

budget constraints. Secondly, now that states are fully implementing source water protections programs,

it may be appropriate to reevaluate the set-aside activities that address source water protection programs

addressed under section 1453 of the Act.

▼ Principles for Future Actions

As we move into the future to address the challenges

that have been identified in this chapter, there are

certain principles that should be followed to ensure that

any actions taken have the greatest benefit. The core

objective of any actions taken should be to promote

sustainable systems which will be better able to protect

public health. By ensuring the technical, financial, and

managerial capacity of water systems; encouraging

service providers to adopt holistic strategies to manage

water on a sustainable basis; creating incentives for

service providers to adopt best management practices

(e.g., consolidation, privatization, restructuring,

improved rate structures, source water protection); and

promoting innovative management techniques (e.g.,

asset management, environmental management systems)

to improve efficiency, utilities can reduce the cost of

service, avoid future funding gaps, and help protect

public health.

The principles which should be kept in mind as

solutions are pursued include:

• Providing Assistance through Enhanced SRFs. For

the present, the SRFs should be considered as the

centerpiece of any new funding that may be provided; program modifications should be made where

needed to increase flexible financial mechanisms.

• Leveraging Existing Programs and the Private Sector.

The integrated use of all state and federal sources for

infrastructure financing and fostering public-private

partnerships and greater participation of private

capital should be encouraged.

• Promoting Innovations and Efficiencies. There are

significant opportunities for developing affordable

and innovative technologies to help reduce the costs

of treatment for new and existing rules and extend

the life of infrastructure. By creating incentives to

The central part of Florida’s Jefferson County is a

rural, economically depressed area with a median

household income of $21,782 and widespread

ground water problems. Most residents have

private wells which lack the depth and casing to

prevent contamination from nearby septic tanks.

There is also concern about surface runoff

contamination, leaking underground gasoline

tanks, and a leak at an area chemical plant that

has contaminated one community’s aquifer.

Over 400 samples of private wells in the area

have tested positive for Coliform bacteria. In

1997, the only drinking water system in the area

was the Lloyd Water Works Authority (LWWA).

In order to complete a necessary expansion,

LWWA asked the Department of Environmental

Protection for financial assistance. During the

early planning stages of the expansion, the

system conducted public meetings and

discovered that people on the whole were

unhappy with the quality of their water.

Community-sponsored efforts spread through

Central Jefferson County and led to the

organization and chartering of the Jefferson

Communities Water System (JEFCOM), a nonprofit cooperative. In August 1998, JEFCOM

received a $158,000 DWSRF preconstruction

grant to plan and design the new, multicommunity system that will consolidate over 30

small, unreliable systems. Once the planning

and design was completed, JEFCOM received an

annual $750,000 DWSRF loan for 3 years

($2.25 million in total). In addition, JEFCOM

received a grant/loan combination from the U.S.

Department of Agriculture for $2.75 million.

With this assistance, the water bill for the average

customer will be kept in the affordable range

between $20 and $25 per month. Even before

construction, the new system had 909 of the

1,000 potential connections signed up for

service. JEFCOM will consist of three wells, two

storage tanks, and over 80 miles of distribution

lines.

Responding to

Customer Needs in Florida

Florida
Chapter 12 — Future of the DWSRF

97

support research, development, and use of innovative technologies, systems can move towards improved services at lower life-cycle costs.

• Encouraging Cost-Based Rates. Appropriate rate structures that are sufficient to cover costs should be

encouraged, while taking care to ensure that water services are affordable for low-income families.

• Encouraging Comprehensive Strategic Planning. Effective planning at all levels should be promoted,

including effective regional planning to maximize use of existing infrastructure to address growing and

shifting populations, and utility planning to address current and future regulatory requirements,

infrastructure needs, security needs, and source water protection.

• Building State Capacity. States must have adequate resources to manage public health and water

quality programs, assist communities, and fully utilize flexibility available under existing grants and

regulations.

The flexibility provided for in the DWSRF program makes it a useful tool in addressing the challenges

ahead. Each of the principles discussed above are currently addressed through the DWSRF program or

could be in the future. In considering the question of whether Congress should continue to authorize

the DWSRF, the answer would appear to be in the affirmative. The program has proven to be a success

in helping states implement their drinking water programs and has provided assistance to public water

systems within the states for infrastructure improvements needed to protect public health.
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