United States General Accounting Office 

GAO Report to Congressional Requesters 

January 2002 DRINKING WATER 

Key Aspects of EPA’s 

Revolving Fund 

Program Need to Be 

Strengthened 

GAO-02-135

Contents


Letter 

Results in Brief


Background


Level of Precision Needed to Assess the Accuracy of EPA’s


Estimate 

States Have Made Limited Use of the Optional DWSRF Provision to 

Assist Disadvantaged Communities 

EPA Is Not Taking Full Advantage of Its Oversight Tools to 

Monitor the States’ Implementation of the DWSRF Program 

Conclusions 

Recommendations for Executive Action 

Agency Comments 

Scope and Methodology 

1 

3 

4 

6 

10 

18 

29 

30 

30 

31 

Appendix I	 Efforts to Determine the Universe of Water Systems 

Eligible for DWSRF Disadvantaged Assistance 

Appendix II	 GAO’s Survey of State Drinking Water Officials 

Regarding Assistance to Disadvantaged Communities 36 

Appendix III Comments from EPA’s Office of Water 

Appendix IV Comments from EPA’s Office of Inspector General 

Appendix V GAO Contact and Staff Acknowledgments 

Tables 

Table 1: Types of Assistance Offered to Disadvantaged 

Communities, by State, through December 31, 2000 13 

Table 2: Percentage of DWSRF Capitalization Grants Used for 

Subsidies to Disadvantaged Communities, by State, 

through December 31, 2000 15 

Page i GAO-02-135 EPA’s Drinking Water Revolving Fund 

33 

41 

43 

44 
Table 3: Scope of Independent Audit Reports Submitted to 

Inspector General 27 

Figures 

Figure 1: Distribution of Estimated Infrastructure Needs, by 

System Size 5 

Figure 2: Assistance to Disadvantaged Communities Under the 

DWSRF Program, by State 12 

Abbreviations 

DWSRF Drinking Water State Revolving Fund


EPA Environmental Protection Agency


NIMS National Information Management System


OIG Office of Inspector General


PER Program Evaluation Review


Page ii GAO-02-135 EPA’s Drinking Water Revolving Fund 
United States General Accounting Office 

Washington, DC 20548 

January 24, 2002


The Honorable W. J. (Billy) Tauzin


Chairman, Committee on Energy and Commerce


House of Representatives


The Honorable Paul E. Gillmor


Chairman, Subcommittee on Environment


and Hazardous Materials


Committee on Energy and Commerce


House of Representatives


The Environmental Protection Agency’s (EPA) most recent national


survey of drinking water infrastructure needs estimates that $150.9 billion


will be needed over the next 20 years to repair, replace, and upgrade the


nation’s 55,000 community water systems to protect public health.1

 To help


communities finance the infrastructure projects needed to comply with


federal drinking water regulations and protect public health, the Congress


established the Drinking Water State Revolving Fund (DWSRF) program in


1996. So far, states have cumulatively received over $4 billion to establish


revolving loan funds to finance improvements at local drinking water


systems. On an annual basis, DWSRF appropriations account for about


10 percent of EPA’s budget at current funding levels.


Under the 1996 amendments to the Safe Drinking Water Act (SDWA), EPA


is required to conduct an assessment of water systems’ capital


improvement needs every 4 years. To this end, EPA developed a survey to


collect data on the nature and cost of infrastructure improvements needed


at local water systems. EPA designed its survey to provide a high level of


precision for the estimated drinking water infrastructure needs.


Specifically, EPA set precision targets such that its national and state-level


estimates would have a 95 percent likelihood of falling within 10 percent


of the actual need.


To establish the DWSRF, the 1996 amendments authorized $9.6 billion, to


be appropriated through 2003. In its annual budgets, EPA requests


appropriations to capitalize the states’ funds and then makes specific


1

Drinking Water Infrastructure Needs Survey: Second Report to the Congress, 

EPA 816-R-01-004, Office of Water (February 2001). 

Page 1 GAO-02-135 EPA’s Drinking Water Revolving Fund 
allotments, or capitalization grants, to each state for that purpose. The 

states use the grants to make low-interest loans to their local water 

systems for improvements that are needed to comply with federal drinking 

water regulations and protect public health. As the loans are repaid, the 

states’ funds are replenished, enabling them to make loans to other eligible 

drinking water projects. To help meet the needs of communities that 

qualify as “disadvantaged,” states may extend loan repayment periods or 

use an amount equal to up to 30 percent of their annual capitalization 

grants to provide additional subsidies to these communities, such as 

offering principal forgiveness. 

Given the size and significance of the DWSRF program, the 1996 

amendments and EPA’s implementing regulations include provisions to 

develop tools, such as information systems, performance reviews, and 

financial audits, to help EPA monitor the states’ implementation of the 

DWSRF program and evaluate program effectiveness. For example, when 

EPA promulgated its DWSRF regulations, it established a national 

information management system (NIMS) to better assess the DWSRF 

program, monitor state progress, and provide assistance in the agency’s 

annual reviews of state programs. EPA also set up a process whereby its 

regional offices annually assess key aspects of state DWSRF programs: 

achievement of state program goals and objectives; compliance with grant 

agreements and applicable statutory provisions, such as funding priorities; 

and the program’s financial status. To determine the adequacy of the 

financial controls in the DWSRF program, EPA’s regulations provide that 

states may voluntarily agree to conduct annual independent audits that 

cover the financial statements, internal controls, and compliance with 

applicable requirements. States that do not conduct their own audits are 

subject to periodic audits by the EPA Office of Inspector General (OIG). 

Concerned about the adequacy of federal, state, local, and private 

resources to meet local drinking water infrastructure needs, you asked us 

to examine three aspects of the DWSRF program: (l) the accuracy of 

EPA’s needs assessment estimate; (2) the extent to which states use the 

optional provision for assisting disadvantaged communities; and (3) EPA’s 

efforts to monitor states’ implementation of the DWSRF program. To 

address the first objective, we analyzed certain aspects of the 

methodology that EPA used to derive its drinking water needs estimate, 

specifically the impact of sampling on the estimate’s precision. For the 

second objective, we surveyed all 50 states to determine how states use 

DWSRF funds to assist disadvantaged communities. For the third 

objective, among other things, we conducted a content analysis of the 

reports on EPA’s Program Evaluation Reviews (PER)—one of the 

Page 2 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Results in Brief 

principal oversight tools that EPA uses to monitor the states’ compliance 

with DWSRF program requirements. 

EPA has taken a number of steps to validate the data included in its 

$150.9 billion estimate of the nation’s drinking water infrastructure needs, 

such as conducting site visits to selected systems and asking states to 

review supporting documentation. However, EPA and other users of the 

needs assessment cannot get a sense of the estimate’s accuracy—how 

closely the estimate reflects actual needs—until EPA calculates and 

reports the estimate’s level of precision. Although EPA set a target for the 

precision of its estimate, without calculating the level of precision actually 

achieved, EPA cannot determine whether it met, or fell short of, this 

target. Because the survey’s results influence the level of congressional 

appropriations for the DWSRF and, more importantly, form the basis for 

EPA’s allotment of these funds to the states, we are recommending that 

EPA calculate and report the level of precision actually achieved in its 

recent needs assessment, and determine what implications, if any, its 

findings have on the methodology used to conduct future needs 

assessment surveys. 

Thirty-one states have established programs as part of their DWSRF to 

assist disadvantaged communities, according to the results of our 50-state 

survey. Of the states with programs, 21 provided about $94 million in 

special subsidies—mainly principal forgiveness—and 23 offered extended 

loan terms. While criteria for defining disadvantaged communities vary, 

states typically use some measure of household water rates relative to a 

community’s median household income. In addition, states reported that 

other factors, such as concerns about depleting the fund and the 

availability of assistance from other federal and state sources, influenced 

their decisions to offer DWSRF assistance to disadvantaged communities. 

EPA is not taking full advantage of the oversight tools that are currently 

available to monitor states’ implementation of the DWSRF program. First, 

EPA is using its national drinking water information management system 

to develop financial management and other measures to monitor state 

progress and support the agency’s review of state programs; however, 

until these draft measures are finalized and consistently applied, their 

utility as an oversight tool is limited. Second, the untimely and 

inconsistent preparation of PER reports—one of EPA’s principal oversight 

tools—hamper its ability to use the reports to identify common or 

recurring problems. Finally, gaps in the financial audit coverage, and a 

limited review of the audits that are performed, hamper EPA’s ability to 

Page 3 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Background 

fully assess the financial condition of the states’ DWSRF programs. We are 

recommending several actions to improve EPA’s use of available oversight 

tools to monitor states’ implementation of the DWSRF program. 

We provided a draft of our report to EPA for its review and comment. EPA 

generally agreed with our recommendations and offered technical 

clarifications, which we incorporated, as appropriate. In addition, we 

restated the basis for our recommendation for EPA to calculate and report 

the level of precision actually achieved in its needs assessment survey. 

EPA is required to conduct an infrastructure needs assessment every 

4 years to estimate the future capital investment needs of drinking water 

systems eligible for DWSRF assistance.

2

 EPA’s assessment is designed to 

include “infrastructure needs that are required to protect public health, 

such as projects to preserve the physical integrity of the water system, 

convey treated water to homes, or ensure continued compliance with 

specific Safe Drinking Water Act regulations.”3

 EPA’s most recent needs 

survey estimates that $150.9 billion will be required from private and 

public sources over the next 20 years to finance drinking water 

infrastructure projects. About 80 percent of the total need 

($119.7 billion) is linked to projects involving the installation, upgrade, and 

replacement of the basic infrastructure needed to deliver safe drinking 

water to the public. The rest of the need—$31.2 billion, or about 

20 percent—will go to projects directly associated with regulatory 

compliance, including $21.9 billion for compliance with existing 

regulations and $9.3 billion related to proposed or recently issued 

regulations, such as those for arsenic and radon. 

While the smallest water systems represent over 80 percent of all 

community water systems, they account for only about 22 percent of the 

total estimated infrastructure needs. In contrast, the largest water systems 

represent about 2 percent of the community systems and account for the 

nearly 44 percent of total needs. Figure 1 shows infrastructure needs, by 

system size. 

2

Eligible systems include community water systems and not-for-profit noncommunity 

water systems. Community water systems serve at least 25 people or 15 connections yearround. Noncommunity water systems serve at least 25 people for more than 60 days but 

less than year-round. 

3

Drinking Water Infrastructure Needs Survey Second Report to Congress, p. 11. 

Page 4 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Figure 1: Distribution of Estimated Infrastructure Needs, by System Size 

Notes: The analysis does not include the costs associated with proposed or recently promulgated 

Safe Drinking Water Act regulations, which are estimated to be $9.3 billion in total. 

The “Other” category includes the needs associated with not-for-profit noncommunity water systems 

and American Indian and Alaska Native Village systems. 

Source: Drinking Water Infrastructure Needs Survey Second Report to Congress, U.S. Environmental 

Protection Agency (February 2001), p.12. 

Subsidized loan assistance is an integral part of the DWSRF program in 

that the interest rates that states offer to local water systems must be at or 

below the current market rate.4

 In addition, the Congress has authorized 

states to use an amount equal to up to 30 percent of their DWSRF 

capitalization grants to provide additional subsidies to communities that 

meet state-defined affordability criteria and thus qualify as 

“disadvantaged.”5

 States with disadvantaged community programs may opt 

4

According to EPA, the weighted average interest rate of DWSRF loans in 2001 was 

2.4 percent, or about 3 percent less than the market rates reported by the states. 

5

The 1996 amendments to the Safe Drinking Water Act defined the term “disadvantaged 

community” to mean the service area of a public water system that meets affordability 

criteria established by the state. 

Page 5 GAO-02-135 EPA’s Drinking Water Revolving Fund 
to forgive a portion of the loan principal or issue a loan at a negative 

interest rate. States also have the option of extending the loan repayment 

period from the standard 20 years to up to 30 years, provided that the 

repayment period does not exceed the expected design life of the project. 

The 1996 amendments and EPA’s regulations contain provisions that 

address EPA’s role in ensuring that states effectively implement the 

DWSRF program. For example, when EPA promulgated its DWSRF 

regulations, it established an information management system to collect 

specific information on how states’ DWSRF moneys are being spent. EPA 

also set up a process whereby its regional offices annually (1) assess the 

success of the states’ performance of activities identified in their intended 

use plans6

 and other reports submitted to EPA and (2) determine 

compliance with requirements in the law, applicable regulations, and the 

grant agreement. To determine the adequacy of the financial controls in 

the DWSRF program, the 1996 amendments required EPA to periodically 

audit state loan funds. Accordingly, EPA’s regulations mandate state 

compliance with the provisions of the Single Audit Act.7

 EPA’s regulations 

further provide that states may voluntarily agree to conduct annual 

independent audits that cover financial statements, internal controls, and 

compliance with applicable requirements. States that do not conduct their 

own independent audits are subject to periodic audits by the EPA Office of 

Inspector General (OIG). 

EPA has taken a number of steps to ensure the validity of the information 

in its needs estimate, such as conducting site visits to selected systems 

and asking states to review supporting documentation. However, while the 

agency set a target for the precision of its estimate, it did not determine 

how close it came to actually achieving its target. As a result, EPA and 

other users of the needs assessment cannot get a sense of the extent to 

6

By law, states must file annual “intended use plans” that provide detailed information on 

the projects to be assisted, the criteria for distributing the assistance, the financial status of 

the fund, and other information. 

7

The Single Audit Act, as amended in 1996, established the concept of replacing multiple 

grant audits with one audit of a recipient, as a whole. A single audit is an organization-wide 

audit that focuses on the recipient’s internal controls and its compliance with laws and 

regulations governing federal awards. Auditors determine which federal programs to 

include in the scope of a single audit based upon the level of federal expenditures and risk. 

At a minimum, the audit will cover all of the major programs receiving significant funding 

unless the auditor deems the programs to be low-risk. 

Level of Precision 

Needed to Assess the 

Accuracy of EPA’s 

Estimate 

Page 6 GAO-02-135 EPA’s Drinking Water Revolving Fund 
which EPA’s estimate reflects actual needs, particularly with regard to 

how the total needs are apportioned among the 50 states. 

EPA Took Steps to Validate 

Its Data, but Did Not 

Calculate or Report a Level 

of Precision When 

Estimating the Nation’s 

Drinking Water 

Infrastructure Needs 

EPA has taken a number of steps to ensure that the information it 

collected about infrastructure needs at local water systems—and the cost 

of addressing those needs—was accurate. For example, EPA sent a 

questionnaire to large and medium-sized systems to collect information on 

capital projects needed to protect the public health. EPA surveyed 

100 percent of the largest water systems (defined, for this purpose, as 

those serving populations of more than 40,000) and a statistical sample of 

medium-sized systems, which amounted to about one-third of the systems 

serving populations between 3,300 and 40,000. According to EPA’s report 

to the Congress,

8

 the water systems were asked to 

•	 describe each project and provide documentation explaining why it is 

needed; 

•	 indicate whether the project would address a current or future need, 

involves installing new or rehabilitating existing infrastructure, and is 

triggered by a SDWA regulation; and 

•	 provide a cost estimate along with related documentation or the project’s 

design capacities so that EPA could use a model to estimate the costs. 

For the smallest water systems, EPA decided that collecting data through 

site visits by trained water systems specialists would provide better 

information than using the questionnaire approach, because small systems 

generally lack the data and personnel to complete a questionnaire of this 

type. EPA selected a statistical sample of about 600 small water systems 

for these site visits. 

In addition to the documentation requirements, EPA arranged for each 

questionnaire response to be reviewed by cognizant state officials to 

ensure that systems thoroughly identified and correctly documented their 

needs. In its February 2001 report to the Congress, EPA reported that 

about 14 percent of the 86,057 projects submitted had been eliminated 

because the documentation criteria had not been met or the project 

appeared to be ineligible for DWSRF assistance.9 

8

Drinking Water Infrastructure Needs Survey Second Report to Congress, p. 58. 

9

Drinking Water Infrastructure Needs Survey Second Report to Congress, p. 23. 

Page 7 GAO-02-135 EPA’s Drinking Water Revolving Fund 
In the case of the large and medium-sized systems, EPA obtained 

information from a sufficient number of systems to estimate infrastructure 

needs on a state-by-state basis. However, EPA officials explained that the 

agency did not have the resources to send specialists to enough small 

systems to get an accurate picture of needs on a state-level basis. 

Specifically, EPA estimated that it would have to conduct site visits at 

approximately 22,000 small water systems to collect enough data to 

estimate needs on a state-by-state basis. Therefore, EPA used the results 

from its site visits to small systems to calculate a national-level estimate of 

small system infrastructure needs and then apportioned the total among 

the states on the basis of each state’s small systems, categorized by 

population served and type of water source. 

In conducting its needs assessment, EPA’s goal was to provide 

“statistically precise” estimates of the infrastructure needs in each state. 

For the large and medium-sized systems, which typically comprise the 

majority of a state’s needs, EPA set a precision target of plus or minus 

10 percent, at the 95 percent confidence level. The target represented a 

95 percent likelihood that the actual or “true” need for a particular state 

fell within 10 percent of the amount estimated. Similarly, for the small 

water systems, the precision target of the national-level estimate was set at 

plus or minus 10 percent, at the 95 percent confidence level. 

In an effort to assess the accuracy of EPA’s needs estimate, we performed 

a limited review of the methodology EPA used to derive its drinking water 

needs estimate, particularly the impact of sampling on the estimate’s 

precision, and determined that EPA probably did not achieve the intended 

level of precision. We found some indications that the actual level of 

uncertainty, or sampling error,10 was higher than EPA’s target, possibly by 

a considerable amount. For example, although EPA was able to use data 

from its 1995 survey in determining the sample size for its 1999 survey, use 

of these data biased its calculations. Specifically, the agency’s approach 

did not account for the fact that it extensively used average costs 

estimated from models when calculating its sample size.11 The practice of 

10Sampling error is a measure of the amount of uncertainty that exists about the true cost 

when costs are estimated from a sample of systems rather than from data collected from all 

systems. 

11For example, in its current needs assessment, EPA had to rely on modeling—and 

substituted the average costs generated by the models—for 67 percent of the capital 

projects identified in its needs survey, including over 80 percent of the projects associated 

with small water systems. Modeling was necessary because project-specific documentation 

was not available in many instances. 

Page 8 GAO-02-135 EPA’s Drinking Water Revolving Fund 
using average costs understated the extent that costs varied from one 

system to the next. Furthermore, estimating highly variable costs typically 

requires a larger sample size than is required in situations with limited cost 

variability. Therefore, EPA’s sample sizes were probably too small, and it 

is likely that EPA did not collect data from enough systems to achieve its 

precision target. 

Another indication that EPA did not meet its precision target specifically 

concerns the estimate for small system needs. Even though EPA’s 

technical experts believed that a simple random sample12 would be 

required to achieve the intended precision target, EPA deviated from this 

sampling methodology in two important ways. First, taking into account 

the prohibitive travel costs associated with visiting 600 randomly selected 

systems located throughout the country, EPA instead used statistical 

sampling to select 100 geographical areas and then chose six systems 

within each area. Although an acceptable approach, such a statistical 

sampling technique can require a considerably larger sample size than 

when simple random sampling is used to achieve the desired level of 

precision. However, EPA did not increase its sample size to account for 

the change in sampling technique, which could have adversely affected the 

sampling error. Second, based on recommendations from an advisory 

workgroup,13 EPA intentionally selected at least one area in each of the 50 

states, Puerto Rico, and the U.S. Virgin Islands. Such geographical 

constraints had the potential to increase the sampling error, thereby 

reducing the level of precision of EPA’s estimate. 

EPA’s Needs Assessment The 1996 amendments to the Safe Drinking Water Act require EPA to use 

Serves as the Basis for the results of its most recent needs assessment survey to allocate the 

DWSRF Allotments to the amount of each state’s annual DWSRF allotment. According to EPA, its 

States periodic surveys are intended to provide statistically precise estimates of 

need for each of the states. Then, EPA allocates the DWSRF funds on the 

basis of each state’s share of the total national need, except that each state 

receives a minimum share of 1 percent. 

12In a simple random sample, each system has an equal chance of being included in the 

sample. 

13The workgroup consisted of state, American Indian, Alaskan Native Village, Indian Health 

Service, and EPA representatives. 

Page 9 GAO-02-135 EPA’s Drinking Water Revolving Fund 
States Have Made 

Limited Use of the 

Optional DWSRF 

Provision to Assist 

Disadvantaged 

Communities 

Although EPA has calculated and reported the actual precision levels for 

other surveys, EPA officials told us that doing so for the drinking water 

needs assessment would not be worthwhile, because it would not affect 

the allocation of DWSRF funds to the states. In addition, according to an 

EPA official responsible for managing the periodic needs surveys, EPA has 

already invested approximately 4 years and $3.6 million to implement its 

most recent assessment and summarize the results. The official said that 

calculating the actual precision of the cost estimates would cost at least an 

additional $30,000 to $40,000. Moreover, actually achieving the precision 

target could further increase the agency’s costs, depending on how many 

additional site visits were needed. However, a number of leading survey 

research associations advocate for the calculation and reporting of the 

precision level to fully inform users of a sample’s limitations.14 

Furthermore, by knowing the precision level of the estimate a user can 

better judge the estimate’s accuracy. Given EPA’s investment in the survey 

thus far—and the billions of dollars that will ultimately be allotted to the 

states—the benefits of determining the estimate’s precision level appear to 

outweigh the projected costs. 

According to the results of our 50-state survey, 31 states have established 

programs as part of their DWSRF to assist disadvantaged communities. Of 

these 31 states, 21 provided about $94 million in special subsidies—mainly 

principal forgiveness—and 23 offered extended loan terms through 

December 31, 2000. 15 While criteria for disadvantaged communities vary, 

states typically use some measure of household water rates relative to a 

community’s median household income. In addition, several factors 

influence states’ decisions to offer DWSRF assistance to disadvantaged 

communities, such as concerns about depleting the fund and the 

availability of assistance from other federal and state sources. 

14The American Association for Public Opinion Research, “in the spirit of upgrading current 

survey practice,” has promulgated a list of best practices that includes reporting a measure 

of each estimate’s precision along with the estimate, rather than reporting only the statistic 

itself. In addition, the Council of American Survey Research Organizations’ code of 

standards and ethics requires that estimates of sampling error be calculated and 

“available.” 

15We used this date because, as part of our analysis, we compared the states’ subsidies to 

disadvantaged communities with the amount of the states’ capitalization grants. At the time 

that we issued our 50-state questionnaire, the most recent information available on state 

capitalization grants was as of December 31, 2000. 

Page 10 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Thirty-One States Offer 

DWSRF Assistance to 

Disadvantaged 

Communities 

Thirty-one states have adopted a disadvantaged community program and 

offer assistance in the form of loan subsidies—that is, forgiving a portion 

of the loan principal or issuing a loan at a negative interest rate—or 

extended loan terms.16 As of December 31, 2000, 25 of these states had 

actually provided assistance to qualified communities. Three of the 19 

states that did not have disadvantaged community programs reported 

plans to offer such assistance as part of their DWSRF programs within the 

next 3 years. Figure 2 shows DWSRF assistance to disadvantaged 

communities, by state. 

16States may extend the loan repayment period from the standard 20 years to up to 

30 years, provided that the repayment period does not exceed the expected design life of 

the project. While an extended loan term makes financing a project more affordable to a 

community by reducing the amount of monthly payments, it is not considered a loan 

subsidy. 

Page 11 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Figure 2: Assistance to Disadvantaged Communities Under the DWSRF Program, by State 

Note: Colorado, Ohio, and Rhode Island reported that they plan to adopt disadvantaged community 

programs within the next 3 years. 

Source: GAO’s survey of 50 state drinking water programs. 

Page 12 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Most States with Most states that have a disadvantaged community program offer principal 

Disadvantaged Community forgiveness or extended loan terms for capital improvement projects. 

Programs Offer Principal States rarely offer negative interest rate loans to disadvantaged 

communities because, according to state DWSRF officials, they find this Forgiveness or Extended option difficult to explain to local communities and difficult to administer. Loan Terms Table 1 shows the type of assistance available to disadvantaged 

communities, by state. 

Table 1: Types of Assistance Offered to Disadvantaged Communities, by State, 

through December 31, 2000 

State 

Number of loan 

agreements with 

one or more types 

of assistance 

Principal 

forgiveness 

Negative 

interest 

rate loans 

Extended 

loan terms 

Alaska 10 x


Arkansas 7


Arizona 1 x x


California 10 x


Delaware 1 x


Florida 20 x


Georgia 21 x


Idaho 0 x


Indiana 10


Kentucky 0 

Maryland 2 x


Maine 17 x


Michigan 3 x


Minnesota 5 x


Montana 2


Nebraska 17 x


New Hampshire 0 x


New Mexico 0 x x


Nevada 0 x


New York 8 x x


Oregon 9 x x


Pennsylvania 9 x


South Carolina 1 x


South Dakota 4 x


Tennessee 0 x x


Texas 6 x x


Utah 4 x


Virginia 19 x x


Vermont 16 x x


Washington 4 x


Page 13 GAO-02-135 EPA’s Drinking Water Revolving Fund 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 

x 
State 

Number of loan 

agreements with 

one or more types 

of assistance 

Principal 

forgiveness 

Negative 

interest 

rate loans 

Extended 

loan terms 

West Virginia 8 

Total 289 19 3 26 

Note: As indicated in the table, six states (Idaho, Kentucky, New Hampshire, New Mexico, Nevada, 

and Tennessee) had not provided assistance as of December 31, 2000. These states had no loan 

agreements that included assistance to disadvantaged communities. In addition, of the four states 

that offer both principal forgiveness and extended loan terms, Arizona, Delaware, and Michigan had 

offered only extended loan terms, while California had used only principal forgiveness. 

Source: GAO’s survey of 50 state drinking water programs. 

Some states limit the amount of loan subsidies they provide to 

disadvantaged communities. For example, 11 states have established caps 

on the amounts of their loan subsidies, such as $500,000 per project or 

50 percent of the project costs. Another eight states offer principal 

forgiveness only in cases when extending the loan term to 30 years does 

not make the cost of a project affordable to the community. For example, 

any water system in California that qualifies for assistance as a 

disadvantaged community automatically receives a loan at 0 percent 

interest and with a term extended to 30 years. If, under those conditions, 

the system’s rates still exceed 1.5 percent of the community’s median 

household income, then the state will offer principal forgiveness—but only 

if the system is publicly owned. Two of the three states that offer negative 

interest rate loans reduce the interest rates on individual project loans 

incrementally until a community’s water rates reach some type of 

affordability threshold. For example, the Vermont DWSRF program 

reduces the interest rate on a project loan by one-tenth of 1 percent until a 

community’s water rates reach an affordable level (as defined by the 

state), but the interest rate may not fall below negative 3 percent. 

In addition to loan subsidies and extended loan terms, many states offer 

disadvantaged communities special interest rates that are less than the 

interest rates available to other DWSRF applicants.17 According to our 

survey results, 20 states offer specially reduced interest rates as low as 

0 percent to disadvantaged communities. In addition, four states that 

currently do not have disadvantaged community programs offer specially 

reduced interest rates to communities with “higher needs.” 

17The standard DWSRF interest rate offered to loan applicants varies by state, but must be 

at or below the current market rate. 

Page 14 GAO-02-135 EPA’s Drinking Water Revolving Fund 

x 
Under the 1996 amendments to the Safe Drinking Water Act, the Congress 

authorized states to use an amount equal to up to 30 percent of their 

DWSRF capitalization grants to provide additional subsidies to 

communities that qualify as “disadvantaged.” To get a rough estimate of 

the magnitude of states’ use of loan subsidies, we compared the 

capitalization grants received by the states as of December 31, 2000, and 

the amount of loan subsidies the states had provided within the same time 

period. We found that of the 14 states that had provided loan subsidies,18 

only Maine came close to reaching the 30 percent cap. Table 2 shows the 

amount of each state’s loan subsidies as a percentage of its capitalization 

grants through December 31, 2000. 

Table 2: Percentage of DWSRF Capitalization Grants Used for Subsidies to 

Disadvantaged Communities, by State, through December 31, 2000 

State 

Subsidies to disadvantaged 

communities as percentage of 

total DWSRF capitalization 

grants 

Total DWSRF 

capitalization 

grants to states 

Amount of DWSRF 

subsidies to 

disadvantaged 

communities 

Maine 23 $27,238,300 $6,339,289 

Virginia 19 73,037,100 14,127,005 

Alaska 16 49,381,100 7,821,000 

Florida 15 109,896,800 16,483,691 

Georgia 13 57,015,200 7,544,010 

Vermont 11 34,900,900 3,921,000 

Nebraska 9 27,409,100 2,567,414 

New York 5 200,542,700 9,752,935 

Utah 4 34,900,900 1,315,000 

Texas 3 239,616,900 7,280,235 

Minnesota 3 79,283,000 2,195,983 

California 2 317,600,600 6,729,021 

Oregon 0.48 52,075,600 250,000 

Maryland 0.46 37,888,610 175,000 

Total $1,340,786,810 $86,501,583 

Source: GAO’s analysis of EPA data and GAO’s survey of 50 state drinking water programs. 

18Although 21 states offer subsidy assistance in their disadvantaged community programs, 

only 14 states have actually forgiven a portion of the loan principal or reduced the loan 

interest rate below zero percent. 

Page 15 GAO-02-135 EPA’s Drinking Water Revolving Fund 
State Criteria for 

Disadvantaged Community 

Assistance Vary 

Under the DWSRF program, states have the flexibility to develop their 

own criteria to define a disadvantaged community. States with 

disadvantaged community programs typically use some measure of 

household water rates relative to the community’s median household 

income to qualify a community as “disadvantaged.” This approach allows 

the state to assess the impact of capital project debt on the community’s 

water rates and measure the project’s affordability. Of the 31 states with a 

disadvantaged community program, 27 have adopted criteria that consider 

local water rates, often in conjunction with a community’s median 

household income. For example, seven states have determined that a 

community qualifies as “disadvantaged” if its water rates are at least 

1 percent of its median household income.19 Another 11 states have 

established thresholds for local water rates ranging from 1.25 to 2 percent 

of median household income. The remaining nine states use different 

thresholds depending on the community’s median household income or a 

formula that considers other factors. 

Twenty-one states use median household income as a criterion in 

determining whether communities qualify as disadvantaged.20 Of these 21 

states, 

•	 14 required a community’s median household income to be at or below the 

median income for the state to be considered disadvantaged and 4 other 

states compare local household income with the median income for the 

county; 

•	 9 offered assistance to disadvantaged communities only if the local median 

household income is no higher than 80 percent of the state or county 

median. In seven states, a community is eligible for assistance if the local 

median income is equal to—or, in one case, 90 percent of—the median 

household income for the state; 

•	 In Michigan and Nebraska, a community can qualify for assistance with a 

median household income as high as 120 percent of the state’s median 

income, provided that the system is publicly owned and its water rates 

exceed the state’s affordability threshold; and 

19According to EPA’s report National-Level Affordability Criteria Under the 1996 

Amendments to the Safe Drinking Water Act (Aug. 31, 2000), the average American 

household typically spends 0.7 percent of its income on water. 

20The state of Utah also has an income-based criterion, but the state uses the median 

adjusted gross income rather than household income. 

Page 16 GAO-02-135 EPA’s Drinking Water Revolving Fund 
•	 19 considered both median household income and water rates in their 

definition of disadvantaged communities. 

In addition to the financial criteria, some states have other qualifications 

that a community must meet before becoming designated as 

disadvantaged. For example, in 11 states only publicly owned water 

systems are eligible for loan subsidies; privately owned water systems, 

such as mobile home parks, are not eligible for such assistance. Four 

states indicated that a community’s drinking water must pose a significant 

public health risk to the residents for the community to be eligible for 

special assistance. In two states, a water system must serve a small 

community to qualify as a disadvantaged community.21 

In the course of our review, we noted that while many states offer a wide 

variety of DWSRF disadvantaged community programs, only a handful of 

states have made an attempt to estimate the universe of water systems 

that met state-defined criteria for disadvantaged communities. Using the 

data provided in EPA’s national sample of small water systems, we 

attempted to estimate the number of systems that might qualify for 

disadvantaged assistance. (See app. I for details.) 

Several Factors Influence As part of our questionnaire, we asked the states to report reasons why 

States’ Decisions to Adopt they had chosen not to adopt a DWSRF program for disadvantaged 

Disadvantaged Community communities. Of the 19 states without disadvantaged community 

Programs programs, we found that 

•	 16 states cited concerns about maintaining the corpus of the fund or the 

long-term viability of the fund as a major (12) or moderate (4) reason for 

not establishing a disadvantaged community program; 

•	 14 states cited the fact that their DWSRF program already offers loans at 

below-market interest rates as a major (9) or moderate (5) reason for not 

offering additional assistance to disadvantaged communities; and 

•	 12 states cited the availability of other federal or state programs to address 

the needs of disadvantaged communities as a major (5) or moderate 

(9) reason for not providing assistance through the DWSRF.22 

21Arizona defines a small community as one with a population of 10,000 or less. Virginia 

defines a small community as one with a population of 3,300 or less. 

22Our responses do not add to 12 because some states cited the availability of both federal 

and state funding as reasons for not using their DWSRF to assist disadvantaged 

communities. 

Page 17 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Non-DWSRF financing from other federal and state sources is available to 

help disadvantaged communities, and many states coordinate with these 

sources to help disadvantaged communities secure the funding they need. 

According to the state drinking water officials we interviewed, 

disadvantaged communities often receive a combination of DWSRF and 

non-DWSRF funding to finance their drinking water projects. For example, 

the Department of Agriculture’s Rural Utilities Service and the Department 

of Housing and Urban Development’s Community Development Block 

Grant program provide grants and loans for activities such as drinking 

water and wastewater projects, planning, and technical assistance. These 

programs target rural and/or low-to-moderate income communities. 

In addition to federal programs, many states sponsor their own grant or 

loan programs. In our survey, more than half the states indicated that they 

provided some type of financial assistance for drinking water projects. Six 

of the 19 states without disadvantaged community programs had state 

grant or loan programs intended specifically to help economically 

distressed communities finance drinking water improvement projects. We 

recently reported that states sponsored over $9 billion in grants and loans 

for drinking water and/or wastewater infrastructure improvements from 

fiscal year 1991 through fiscal year 2000. 23 Most of the assistance was 

generally available, but some assistance was specifically targeted at 

economically distressed communities. 

As part of its ongoing effort to monitor states’ implementation of the 

DWSRF program, EPA has developed a national information management 

system to track states’ use of DWSRF funds. While EPA is using the system 

to develop financial management and other measures, until these 

measures are consistently applied during performance reviews of state 

DWSRF programs, their utility as an oversight tool is limited. Furthermore, 

problems with the timely and consistent preparation of PER reports—one 

of EPA’s principal oversight tools—hamper its ability to use the reports to 

identify common or recurring problems among the states. Finally, gaps in 

the financial audit coverage, and a limited review of audits that are 

performed, affect EPA’s ability to fully assess the financial condition of the 

states’ DWSRF programs. 

EPA Is Not Taking 

Full Advantage of Its 

Oversight Tools to 

Monitor the States’ 

Implementation of the 

DWSRF Program 

23Water Infrastructure: Information on Federal and State Financial Assistance 

(GAO-02-134, Nov. 30, 2001). 

Page 18 GAO-02-135 EPA’s Drinking Water Revolving Fund 
EPA Could Make Better 

Use of Its Information 

System to Monitor State 

Performance and Provide 

Information on Overall 

Program Effectiveness 

EPA designed its drinking water national information management system 

(NIMS) to better assess the DWSRF program, monitor state progress, and 

provide assistance in the agency’s annual reviews of state programs. The 

NIMS database contains a variety of information on the amount and status 

of DWSRF moneys, the states’ progress in getting funds to local 

communities, the types of assistance being provided, and other 

information. Currently, EPA’s information system can produce 83 standard 

reports on various aspects of the DWSRF program. For example, NIMS 

can report the amount of assistance by system size and type of project, 

such as the construction of treatment or storage facilities, construction of 

distribution systems, or land acquisition, as well as the amount of 

assistance provided to small water systems. EPA requires states to submit 

information annually on their use of DWSRF funds, and updates NIMS 

accordingly.24 NIMS can produce reports showing information on an 

annual or cumulative basis, aggregate information on a state-by-state basis 

or by EPA region, and provide customized reports. 

EPA’s NIMS database and the reports that it can generate provide a useful 

national perspective on the DWSRF program in terms of the amount and 

type of assistance that states provide to local communities. For example, 

EPA can use NIMS data to determine the cumulative amount of DWSRF 

assistance as a percentage of the funds available since the program’s 

inception. EPA can also provide cumulative reports on the pace of the 

DWSRF program in getting assistance out to local communities, including 

such information as project starts, project disbursements, projects 

completed, and loan principal repayments. 

While useful in many ways, NIMS has some limitations in monitoring state 

progress. In particular, the system was not designed to monitor the extent 

that states comply with statutory spending restrictions. According to EPA 

officials, NIMS was designed to track the states’ overall program activity 

using funds from multiple sources, including capitalization grants, state 

matching funds, and other sources, such as loan repayments. They also 

noted that designing a system capable of tracking compliance with the 

spending restrictions would be difficult and unworkable because of the 

timing of the movement of funds in the program. For example, states can 

receive annual grants over a 2-year period and may obligate funds from 

one grant to projects over a period of several years. 

24Currently, the system contains information covering the period from July 1, 1997, through 

June 30, 2001. 

Page 19 GAO-02-135 EPA’s Drinking Water Revolving Fund 
In addition to tracking some elements of state progress, NIMS provides 

useful information that EPA regional officials can use when conducting 

their annual performance evaluations of state DWSRF programs. However, 

officials in 7 of the 10 regions said that they used the system either on a 

very limited basis or never used it at all, primarily because more timely 

information was readily available from other sources. EPA headquarters 

officials pointed out that NIMS is relatively new; the initial data collection 

took place during the late summer of 2000 and the final data were not 

available for oversight purposes until November 2000. The officials said 

that they would now start working with regional officials to make greater 

use of the information system in their annual state performance 

evaluations. 

In April 2001, DWSRF program managers at EPA headquarters drafted 

financial management and other measures that rely on NIMS data to track 

the progress of the program. The financial management measures address 

the following aspects of state DWSRF programs: 

•	 progress in committing funds to projects (such as loan assistance as a 

percentage of funds available); 

•	 pace of construction (such as disbursements as a percentage of assistance 

provided); and 

•	 the extent that DWSRF moneys are being recycled (such as principal 

repayments as a percentage of assistance provided). 

The success of this effort, however, hinges on the regional offices making 

greater use of NIMS. In addition, the agency is currently using the draft 

measures for internal management purposes only. However, until these 

measures are consistently applied during performance reviews of state 

DWSRF programs, their utility as an oversight tool cannot be assessed. 

Furthermore, by limiting these measures to internal use, they cannot be 

used by others outside EPA to assess the program’s overall effectiveness. 

EPA’s Annual Evaluations According to EPA officials, in addition to the regular day-to-day contacts 

of State DWSRF Programs with state DWSRF staff, the annual program evaluation reviews of state 

Are Not Timely or DWSRF programs serve as one of the agency’s principal oversight tools. 

Consistent Among other things, the objectives of the annual review are to evaluate 

(1) a state’s success in achieving the goals and objectives outlined in its 

intended use plan and other reports submitted to EPA; (2) how well a 

Page 20 GAO-02-135 EPA’s Drinking Water Revolving Fund 
state’s DWSRF program is achieving the intent of applicable statutory 

provisions, such as funding projects in accordance with identified 

priorities;25 (3) a state’s compliance with the conditions of its capitalization 

grant agreements; and (4) the financial status of a state’s DWSRF. 

However, we found that many reviews were not timely or consistent in 

terms of their scope or documentation. 

EPA’s regional offices are responsible for conducting annual reviews of 

state DWSRF programs. According to EPA’s guidance, such reviews 

should (1) include an on-site visit to meet with state program managers 

and review pertinent records and a written report to document the results 

of the review and (2) culminate in a written report. The guidance also 

states that the reviews should take place within “a reasonable time period” 

following receipt of a state’s biennial report.

26 While there is no definitive 

requirement for the timing of the annual reviews, EPA program managers 

said that the regional offices are expected to prepare a report 

documenting the results of the review within 90 days of the site visit to a 

state. 

To evaluate the timeliness of EPA’s state performance evaluations, we 

focused on two key elements: (1) the preparation of final reports within 

90 days of the site visits and (2) the requirement that reviews be 

conducted annually. We found the following: 

•	 Of the 47 states for which the EPA regional offices had prepared reports 

on their annual reviews, 60 percent of the reports were issued late, and 

EPA’s regional offices exceeded the 90-day time limit by about 4 months, 

on average. In six states, the reports were over 9 months late. Limited 

staffing is one of the major reasons that the reports are not completed on 

time, according to regional officials. In addition, officials from three EPA 

regions told us that the reports were delayed to allow time for concerns 

discovered during on-site reviews to be resolved with the states. 

25Under the 1996 amendments, states must give priority, to the maximum extent 

practicable, to funding projects that (1) address the most serious risk to human health, 

(2) are necessary to ensure compliance with the requirements of the Safe Drinking Water 

Act, and (3) assist systems most in need, on a per household basis, according to a state’s 

affordability criteria. 

26This schedule applies in the years that a biennial report is due. EPA’s DWSRF guidance 

indicates that the review should be conducted on approximately the same date in the “off 

years” when a biennial report is not due. 

Page 21 GAO-02-135 EPA’s Drinking Water Revolving Fund 
•	 As of October 2001, EPA officials have not prepared evaluation reports for 

New Jersey, Utah, or Wyoming. In New Jersey, EPA officials said that 

regional officials visited the state every 6 months and covered many of the 

elements that would otherwise be addressed in a formal review. In Utah 

and Wyoming, regional officials made site visits to conduct the annual 

reviews during July and December 1999, respectively, but never issued 

reports. EPA headquarters officials told us that regional officials did not 

issue a report for Utah’s program and instead issued a Notice of 

Noncompliance, which covered the deficiencies identified during the 

review.

27 In the case of Wyoming, regional officials said that they wanted to 

conduct a second, follow-up review before issuing a final report, but had 

encountered scheduling difficulties over the past 22 months. 

•	 In 10 states, EPA regional officials did not issue PER reports during 

calendar year 2000, although reporting was resumed the following year. In 

11 more states, the most recent performance evaluation reports were 

issued more than a year ago and, as of October 1, 2001, they were late by 

about 9 months, on average. According to several EPA regional officials, 

they did not prepare evaluation reports on an annual basis because of 

staffing constraints. 

•	 Although the reporting has not been timely, EPA has conducted annual, 

on-site reviews in most states. We found four states—Alaska, Michigan, 

Oregon, and Wyoming—that have not received an on-site performance 

evaluation within a year of the previous one. As of October 1, 2001, the 

time elapsed since the last review in these states ranged from 15 to 

30 months. 

In conducting a content analysis of the 47 available PER reports, we found 

inconsistencies in their scope and documentation. According to EPAissued guidance to assist its regional offices,28 an annual review should 

consider the legal, managerial, technical, financial, and operational 

capabilities of the applicable state agency to effectively administer the 

DWSRF. The guidance states that the regional offices should evaluate state 

adherence to 17 certifications and assurances that are required of a state 

to receive a capitalization grant. For example, regional officials are 

27Two problems identified in the Notice of Noncompliance were slow progress in 

committing loan funds and inadequate staffing levels. EPA headquarters officials told us a 

visit was made during 2000, and a draft PER was provided to the state in April 2001. 

Officials say that the problems have now been resolved, but the draft has not been 

finalized, based on a management decision. 

28Annual Review Guide Drinking Water State Revolving Fund, U.S. Environmental 

Protection Agency, March 1999. 

Page 22 GAO-02-135 EPA’s Drinking Water Revolving Fund 
expected to check that the state has provided adequate personnel and 

other resources to effectively operate and manage the program, met 

matching requirements, and complied with applicable laws and 

regulations. In addition to these federal program assurances, the guidance 

calls for an evaluation of other aspects of a state’s DWSRF program during 

an annual review. For example, in terms of general program management, 

regional officials should assess the eligibility of the DWSRF assistance as 

it pertains to the recipients, types of projects, and types of financial 

assistance provided. Similarly, within the general category of financial 

management, regional officials are expected to check on the adequacy of 

the financial statements and internal controls, the timeliness of deposits 

into appropriate fund accounts, the use of funds for set-aside purposes, 

and other items. 

In total, the guidance identifies about 50 specific elements that should be 

covered in an annual review. EPA recognizes that every element does not 

require an in-depth review each year and gives its regional offices the 

flexibility to tailor their reviews as appropriate. Specifically, the guidance 

states: “Each year the review may be targeted toward specific program 

aspects that have not previously or recently been reviewed in-depth or 

have proven to be problematic in the past. This will allow the region to 

concentrate its efforts on program aspects that require attention.”29 In 

terms of documenting the annual reviews, EPA’s guidance states that, at a 

minimum, the reports should include sections on purpose, background, 

scope, observations, and recommendations. 

One of the major problems we identified in reviewing EPA’s performance 

evaluation reports was that they often had no clear or specific description 

of what was and was not covered in the annual review. For example, in 15 

reports, the scope of the review was reported only in terms of a state fiscal 

year and a list of the project files reviewed. Another 15 reports described 

the scope in very general terms and noted only the broadest categories of 

review, such as “financial management.”30 As a result of the inadequate 

scope descriptions and wide variation in the level of detail with which 

regional officials summarized their observations, we often could not 

determine what was covered in the review or what regional officials 

29Annual Review Guide Drinking Water State Revolving Fund, p.12. 

30Although we found a total of 29 reports that described the scope in very general terms, 

14 of these reports used a checklist approach or organized the report in such a way that its 

users could infer which specific program elements were covered in the annual review. 

Page 23 GAO-02-135 EPA’s Drinking Water Revolving Fund 
concluded about each aspect. More specifically, when the reports were 

silent regarding certain program elements, we could not determine 

whether the reason was that the elements were reviewed and found to be 

satisfactory or not reviewed at all. 

EPA officials from headquarters and regional offices offered a variety of 

explanations for the inconsistencies in the documentation of the state 

performance evaluations. For example, some officials viewed the program 

evaluation reports principally as a tool to assist the states, rather than as a 

means of helping EPA to evaluate overall program effectiveness. These 

officials told us that it is unnecessary for the written reports to contain 

detailed information because the findings are conveyed to the states 

orally. Officials from some regional offices indicated their reluctance to 

include concerns in a written report if the concerns had already been 

brought to the attention of the state and resolved. We also heard that 

staffing and time constraints hampered the ability of regional staff to 

document their reviews more thoroughly and, in some instances, this 

meant reporting findings on an exception basis. However, using the latter 

approach when the scope of the review is unclear makes it impossible to 

determine whether some program elements were reviewed and found to 

be satisfactory or simply not reviewed. 

A key DWSRF program manager at EPA headquarters generally concurred 

with our observations, noting that one of the agency’s areas of concern has 

been the timeliness and quality of the regions’ annual reviews and the 

resultant performance evaluation reports. In May 2001, the managers 

developed a regional review strategy for annually reviewing the regional 

offices’ performance in implementing their oversight responsibilities.

31 

Among other things, these reviews would cover the (1) documentation of 

regional observations, findings, and general oversight activities; 

(2) adequacy of staffing and resource allocations for regional oversight; 

and (3) adequacy of annual reviews of state DWSRF programs, including 

an assessment of the timeliness and completeness of the region’s 

performance evaluation reports. While initiating the regional reviews is a 

positive step, other actions may be warranted to improve the usefulness of 

the annual state reviews both in assisting the states and as a tool for 

evaluating overall program effectiveness. At this time, EPA has no 

centralized system for tracking the timeliness of the annual reviews or 

31As of October 2001, headquarters officials had completed their reviews and issued draft 

reports for 2 of the 10 regional offices. 

Page 24 GAO-02-135 EPA’s Drinking Water Revolving Fund 
performance evaluation reports by its regional offices, identifying common 

or recurring problems among the states, or monitoring the status of their 

corrective actions. 

Gaps in Audit Coverage 

Limit EPA’s Ability to 

Assess State Programs’ 

Financial Condition 

In accordance with the 1996 amendments to the Safe Drinking Water Act, 

EPA’s implementing regulations contain provisions directed to “ensure the 

financial integrity of the DWSRF program.” Under the amendments, for 

example, EPA was required to periodically audit the states’ DWSRF funds. 

In addition, EPA was required to publish guidance and regulations to 

ensure, among other things, that the states (1) commit and expend funds 

as efficiently as possible and (2) use accounting, audit, and fiscal 

procedures that conform to generally accepted accounting principles. 

EPA’s regulations further provide that states may voluntarily agree to 

conduct annual independent audits that cover financial statements, 

internal controls, and compliance with applicable requirements. States 

that do not conduct their own audits are subject to periodic audits by OIG. 

EPA’s regulations also specify that states provide detailed financial 

statements presenting the financial status of the DWSRF in their biennial 

reports to EPA. 

EPA relies primarily on its OIG to assess the adequacy of the DWSRF 

program’s financial controls. To facilitate the process, officials from EPA’s 

program offices and OIG developed an audit strategy for the DWSRF 

program.

32 According to our discussions with these officials, the key 

elements of the DWSRF audit strategy are 

• conducting audits in states that did not perform their own; 

• reviewing the quality of the independent audits done by the states; and 

• developing OIG guidance for the conduct of DWSRF audits. 

As of September 2001, EPA has yet to fully implement its audit strategy. 

First, the Inspector General did not audit the eight states that (1) had not 

voluntarily agreed to conduct an independent audit or (2) did not have a 

32In November 1996, after a year of discussions with EPA’s Office of Water and Office of 

Wastewater Management, the Inspector General and the program offices reached 

agreement on an audit strategy for the Clean Water State Revolving Fund Program. 

Following the authorization of a DWSRF and discussions with EPA’s Office of Ground 

Water and Drinking Water and others, the audit strategy was revised to include the DWSRF 

program about a year later. 

Page 25 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Single Audit that was considered the equivalent of an independent audit.33 

Second, the Inspector General reviewed the audit quality of only 7 of the 

24 audits submitted by states for fiscal year 2000. Finally, the Inspector 

General has not issued guidance on conducting DWSRF audits; officials 

from EPA’s regional offices believe such guidance would benefit them as 

well as the states. 

The Inspector General is now in the process of scheduling audits in states 

where no audit has been conducted; the first is underway in the state of 

Washington, and EPA plans to issue its final report on that state in 

February 2002. Inspector General officials told us that they prioritize the 

states to be audited according to the resources available to conduct the 

audits and the Inspector General’s experience with the states in question. 

They also consider other criteria, including the amount of time that has 

elapsed since the state’s Clean Water State Revolving Fund was audited 

and whether the Clean Water and Drinking Water funds are managed by 

the same state agency. 

Both EPA and OIG officials told us that auditing states where DWSRF 

programs had never been audited any sooner would not have been costeffective because of the relatively low level of the loan activity in the 

states’ DWSRF programs during its early years. In addition, the Inspector 

General’s Western Audit Division, which is responsible for conducting and 

reviewing audits in both the Clean Water State Revolving Fund and 

DWSRF programs, has only four staff to devote to this effort. OIG officials 

told us that because the Clean Water funds have been in existence much 

longer, and are much larger, than their DWSRF counterparts, they take 

priority as a result. 

In an effort to track the status of independent audits of states’ DWSRF 

programs, an OIG official recently developed a spreadsheet to collect 

information on (1) when the audit reports were submitted and (2) the 

scope of the audit reports. Specifically, the spreadsheet was designed to 

track whether the audits covered the elements that, according to EPA’s 

regulations, should be included: 

33Ten states have not completed an independent audit: Hawaii, Missouri, Nevada, New 

Hampshire, Oregon, South Carolina, Tennessee, Texas, Utah, and Washington. According 

to EPA officials, however, Hawaii is now in the process of conducting its first independent 

audit. In addition, Inspector General officials determined that the financial review done in 

conjunction with the Single Audit Act in Texas was sufficiently detailed to make it an 

acceptable substitute for an independent audit. 

Page 26 GAO-02-135 EPA’s Drinking Water Revolving Fund 
• an auditor’s opinion on the DWSRF program financial statements; 

• reports on internal controls; and 

•	 reports on compliance with applicable statutory, regulatory, and general 

grant requirements. 

The spreadsheet lists audit reports for 32 states, of which 24 covered 

fiscal year 2000, 7 covered fiscal year 1999, and 1 covered fiscal year 1998. 

Table 3 provides a summary of the spreadsheet data. 

Table 3: Scope of Independent Audit Reports Submitted to Inspector General 

Status as determined by Inspector General 

Key elements of independent audit OK No or none Disclaimer Marginal Total 

Financial statements 31 1 

Internal controls 28 3 1 

Compliance 20 3 9 

Legend: 

“OK” means that the auditor’s opinion on the financial statements or the auditor’s report on internal 

controls was adequate or that the auditor’s report contained an opinion on compliance. 

“No or none” means that the auditor did not provide an opinion on internal controls or compliance. 

“Disclaimer” means that the auditor’s report contained a disclaimer stating that compliance was not 

an objective of the audit. 

“Marginal” means that auditor’s opinion or report did not contain enough information and was, 

therefore, marginally acceptable. 

Source: EPA’s Office of Inspector General. 

Based on data contained in the OIG spreadsheet, some of the independent 

audits were limited in scope or less than adequate in reporting on some of 

the elements. For example, three states did not provide a report on 

internal controls or compliance. 

In addition to checking the extent that the 32 state audit reports covered 

the three elements described in EPA’s regulations, OIG officials conducted 

a more detailed review for 10 of these reports for audit quality.34 OIG 

officials told us that although it would be desirable to check more reports 

for audit quality, checking audit quality was a lesser priority than getting 

states to voluntarily conduct independent audits and making sure that 

these audits covered the elements. 

34Over the past 8 to 10 months, OIG officials reviewed seven audit reports covering state 

fiscal year 2000, two covering state fiscal year 1999, and one for state fiscal year 1998. 

Page 27 GAO-02-135 EPA’s Drinking Water Revolving Fund 

32 

32 

32 
DWSRF program and OIG officials acknowledge that EPA does not have a 

process for ensuring that (1) the state and the cognizant regional officials 

are informed of any concerns about audit coverage or quality or 

(2) corrective action is taken. Such coordination between program and 

OIG officials is necessary because, according to program officials, they do 

not systematically monitor the status of the states’ independent audits. 

DWSRF program officials noted that resource constraints limit their ability 

to review the audits themselves, and as a result, they increasingly rely on 

the OIG to review audits and assess their quality. For example, one 

regional official we interviewed reported having no available financial staff 

to review state DWSRF programs, and an official from another region 

stated that budgetary constraints limited the amount of time he could 

spend reviewing DWSRF financial documents. 

The Inspector General has not developed guidance for the conduct of 

DWSRF audits. Officials from several of the regional offices we contacted 

told us that such guidance would be beneficial to DWSRF program 

auditors. However, according to one OIG official, the development of such 

guidance has been delayed until the office can incorporate any insights it 

gains from conducting its own audits at the states—audits which are now 

just in the planning stages. Although the OIG originally scheduled the 

DWSRF audit guidance to be completed in fiscal year 2001, it now expects 

to have the guidance available for the states and other interested parties 

during fiscal year 2002. In the meantime, OIG officials noted that other 

guidance is available, such as the Inspector General’s Comprehensive 

Audit Guide for the Clean Water State Revolving Fund, the OMB Circular 

A-133 compliance supplement,35 and model DWSRF financial audit 

statements. 

In addition to guidance, better coordination and information sharing are 

needed between the DWSRF program office and OIG staff. Officials from 

four regional offices told us that they were unaware of the Inspector 

General’s planned audit schedule and, in one instance, expressed concern 

that they had not been consulted about which states should receive 

priority. In addition, although we found some indications that either 

35The OMB Circular A-133 (issued pursuant to the Single Audit Act, P.L. 98-502, and the 

Single Audit Act Amendments of 1996, P.L. 104-156) sets forth standards for obtaining 

consistency and uniformity among federal agencies for the audit of states, local 

governments, and non-profit organizations expending federal awards. A compliance 

supplement was issued to this circular in March 2000 to address specific DWSRF reporting 

requirements. 

Page 28 GAO-02-135 EPA’s Drinking Water Revolving Fund 
headquarters or regional officials had requested assistance from the 

Inspector General as a result of problems or concerns identified during 

annual reviews, OIG officials did not receive copies of the regional 

performance evaluation reports on a regular basis. These reports 

sometimes contain indications of problem areas, such as poor cash 

management or inadequate staffing levels, which could be useful in 

helping the Inspector General to identify and prioritize candidates for 

closer scrutiny, such as checking the quality of states’ independent audits. 

Similarly, although the OIG spreadsheet on the status of state audits was 

intended only for internal use, regional officials might have benefited from 

knowing about gaps in audit coverage or other limitations when they 

prioritized, and determined the scope of, state performance evaluations. 

Conclusions
 EPA has laid the groundwork for its DWSRF program. It must now 

safeguard program funds through prudent oversight and good 

management to ensure the long-term viability of the DWSRF program and 

the availability of this major source of infrastructure financing for 

generations to come. 

EPA’s estimate of the nation’s drinking water infrastructure needs has 

far-reaching implications. First, it influences the level of congressional 

appropriations for the DWSRF program. Second and more importantly, 

EPA uses this estimate to guide the agency’s annual allocation of DWSRF 

funds to the states. Although EPA has taken steps to validate the data to 

instill confidence in the estimate and its subsequent allotments to the 

states, the precision of the estimate is unknown. Until EPA calculates and 

reports the level of precision in its needs assessment survey it does not 

know how close the estimate comes to reflecting the nation’s true needs. 

Measuring the overall effectiveness of a program as complex as the 

DWSRF is not an enviable task. EPA has an opportunity while the program 

is maturing to use the oversight tools at its disposal to diagnose the 

program’s overall health and prescribe remedies as needed. However, EPA 

is not making the most out of these tools. Without finalizing and applying 

its financial management measures, bringing greater consistency to its 

annual review process, and monitoring audit coverage and quality, EPA 

does not have all the information it needs to monitor the states’ 

implementation of the program or assess the program’s overall 

effectiveness. 

Page 29 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Recommendations for 

Executive Action 

To get a better sense of the accuracy of EPA’s estimate, we are 

recommending that EPA calculate and report the level of precision 

actually achieved in its recent needs assessment, and determine what 

implications, if any, its findings have on the way future needs assessment 

surveys are conducted. 

To improve EPA’s oversight of the DWSRF program and its ability to 

assess overall program effectiveness, we recommend that the EPA 

Administrator take the following steps: 

•	 finalize and consistently apply financial management and other program 

measures to assist in the annual review of state performance and make 

them available outside EPA, so that others can assess the overall 

effectiveness of the program; 

•	 improve the timeliness of and require greater consistency in the scope and 

documentation of the annual program evaluations, so that the results of 

the evaluations can be systematically reviewed to identify broad-based 

problems that may require national solutions; 

•	 conduct independent audits in the states where no audits have been done, 

track and evaluate the quality of audits performed by others, and complete 

financial audit guidelines for the DWSRF program; and 

•	 facilitate the exchange of audit findings and program evaluation results 

between DWSRF program and OIG officials. 

Agency Comments
 We provided a draft of this report to EPA for its review and comment. 

EPA’s Office of Water and Office of Inspector General provided 

comments, which we have included in appendixes III and IV of this report, 

respectively. Overall, EPA agreed with our findings and recommendations. 

Although EPA indicated that it would revisit the issue of calculating actual 

precision levels in the design of its 2003 survey, our recommendation 

called for more specific action. Namely, we recommended that EPA 

calculate and report the level of precision for its 1999 needs assessment 

and determine the implications, if any, it has on how the 2003 survey is 

conducted. Knowing the level of precision actually achieved will help EPA 

and other users of the needs assessment get a sense of how closely the 

estimate reflects actual needs. EPA also provided technical clarifications, 

which we incorporated, as appropriate. 

Page 30 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Scope and 

Methodology 

To conduct our work, we interviewed officials in EPA’s Office of Ground 

Water and Drinking Water and Office of Wastewater Management where 

we obtained and reviewed relevant legislation, regulations, guidance, 

reports, and other documents. We also interviewed DWSRF officials in 

each of EPA’s 10 regional offices and officials from the Office of the 

Inspector General at EPA headquarters and offices in Sacramento and San 

Francisco, California, and in Denver, Colorado. Finally, we conducted a 

nationwide survey of key drinking water officials in the 50 states. 

To address the first objective, we conducted interviews with officials in 

EPA’s Office of Ground Water and Drinking Water and their technical 

advisers about EPA’s needs assessment survey, the particular 

methodologies used to estimate the cost of needed drinking water facility 

improvements over the next 20 years, and how those estimates were used 

to allot moneys to the states. We reviewed available documentation on the 

statistical sampling and estimation methods used in the EPA survey as 

well as the documentation describing EPA’s data collection and quality 

control procedures. We also developed and conducted a survey of all 50 

states’ drinking water officials to ascertain the magnitude of the 

disadvantaged community need and the extent to which states were using 

the DWSRF program to address that need. We obtained responses from all 

50 states. As part of our survey of state officials, we asked officials to 

indicate whether each of the small systems in EPA’s needs assessment 

sample qualified as a disadvantaged system. We used this information to 

estimate the number of disadvantaged small systems in the 50 states. 

(See app. I.)36 

To examine EPA’s efforts to evaluate program effectiveness, we obtained 

information on the data elements and standard reports within EPA’s 

national information management system for the DWSRF program and 

interviewed headquarters and regional officials regarding their use of the 

system and its limitations. To assess the timeliness of the annual review 

process, we obtained information on the submission dates for the states’ 

biennial reports, the dates that regional offices conducted annual reviews 

36In developing our estimate, we used the weights assigned by EPA to each of the systems 

included in its needs assessment sample. We did not independently verify the accuracy of 

these weights. The weight assigned to a system indicated the number of small systems 

nationwide that the system represented. Thus, the sum of the weights of all sampled 

systems represents all small systems in the 50 states. Similarly, by totaling the weights 

assigned to the sampled systems that the states identified as being disadvantaged, we could 

develop an estimate of the number of disadvantaged systems among the 24,342 systems 

represented by the responses to our survey. 

Page 31 GAO-02-135 EPA’s Drinking Water Revolving Fund 
of state DWSRF performance, and the dates that the evaluation reports 

were issued. We reviewed EPA’s guidance on the annual review process, 

along with the most recently completed performance evaluation report for 

each state, and evaluated the scope and content of the reports relative to 

EPA’s guidance. We obtained the views of headquarters and regional 

DWSRF officials on the purpose of the annual review process and the 

evaluation reports and the reasons for differences in the timing, scope, and 

documentation of the reviews. To examine EPA’s strategy for ensuring the 

financial integrity of the DWSRF program, we interviewed EPA program 

and Inspector General officials about their roles and responsibilities. We 

also obtained information on the Inspector General’s efforts to monitor the 

quality of the states’ independent audits and to conduct audits in the states 

that lacked audits of their own. Finally, we reviewed excerpts from EPA’s 

Strategic Plan as well as annual performance measures developed for the 

DWSRF program to assess the agency’s use of results-oriented 

performance measures. 

We conducted this review from October 2000 through November 2001 in 

accordance with generally accepted government auditing standards. 

As we agreed with your office, unless you announce its contents earlier, 

we plan no further distribution of the report until 30 days from the date of 

this letter. We will then send copies to the EPA Administrator and make 

copies available to others who request them. 

If you, or your staff, have questions about this report, please call me on 

(202) 512-3841. Contributors to this report are listed in appendix V. 

John B. Stephenson 

Director, Natural Resources 

and Environment 

Page 32 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix I: Efforts to Determine the 

Universe of Water Systems Eligible for 

DWSRF Disadvantaged Assistance 

Because providing additional loan subsidies to disadvantaged 

communities can affect the extent that states’ revolving funds are 

replenished, we were interested in finding out what proportion of the 

nation’s community water systems qualified as disadvantaged 

communities and would thus be eligible to receive special assistance. EPA 

officials told us that they had never tried to estimate the number of water 

systems that qualified for such assistance. Furthermore, only 3 of the 50 

states responding to our survey made attempts to develop such estimates. 

As part of our review, we tried to use EPA’s needs assessment—and its 

statistical sample of small water systems in particular—as a vehicle for 

estimating the number of systems that were potentially eligible. 

As part of a 50-state survey on DWSRF assistance for disadvantaged 

communities,

1

 we asked the states with disadvantaged community 

programs to report whether they had estimated the number of water 

systems that would meet state-established criteria for a disadvantaged 

community. According to our summary of their responses, only 3 of the 31 

states with programs made some attempt to develop such estimates, while 

the remaining 28 had not. When asked why they had not estimated the 

number of disadvantaged communities, 18 states reported that they did 

not have the data needed to determine whether particular systems meet 

the disadvantaged criteria until they actually applied for DWSRF 

assistance. Under EPA regulations, states may provide assistance to 

communities that meet the state’s definition of “disadvantaged” or which 

the state expects to qualify as disadvantaged as a result of the project. 

Thus, while the number of systems that currently meet a state’s definition 

might be relatively easy to estimate, determining the number of additional 

systems that would fall into the disadvantaged category because of the 

high cost of a project, for example, would require a case-by-case analysis. 

Other reasons that states gave for not developing an estimate included 

insufficient resources (five states) and the fact that getting such 

information was not a need or priority for the state (five states). 

Two of the three states that had estimated the number of their 

disadvantaged systems generally did so by using a shortcut method 

designed to project the magnitude of need. For example, Kentucky 

reached its estimate that about 320 systems, or 43 percent of the 

community water systems in the state, could be considered disadvantaged 

1

A copy of the questionnaire with a summary of the states’ responses is included in 

appendix II. 

Page 33 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix I: Efforts to Determine the Universe 

of Water Systems Eligible for DWSRF 

Disadvantaged Assistance 

by comparing water rates as a percentage of median household income. 

However, according to state officials, the data on water rates were about 

5 years old. New Mexico came up with a rough estimate of 500—about 

63 percent of the state’s 795 community water systems—on the basis of 

the percentage of disadvantaged systems that had already applied for 

DWSRF assistance. Utah was the only state to develop an estimate by 

applying its own criteria for disadvantaged communities.

2 The state 

determined that 112 communities, or about 25 percent of the state’s 449 

community water systems, would qualify for the additional subsidies 

available to the disadvantaged. 

In an effort to develop our own national estimate of the number of 

disadvantaged communities, we started with same statistical sample of 

small water systems that EPA had selected for its infrastructure needs 

assessment because, according to EPA officials, the vast majority of 

systems serving disadvantaged communities are likely to be small 

systems.3 (Among other problems, small water systems often lack the 

economies of scale that make infrastructure projects more affordable at 

larger systems.) In addition, having the statistical sample meant that we 

would be able to project the results to the universe of small systems and 

obtain a national estimate. 

As part of our 50-state questionnaire, we identified the specific systems 

included in EPA’s sample—from 5 to 34 systems in each state—and asked 

the states to determine which ones they would consider to be 

disadvantaged communities. When states were able to apply their own 

criteria, we asked them to determine whether each system initially 

qualified as disadvantaged or became disadvantaged as a result of the 

additional costs needed to improve it. States without specific criteria—or 

states with criteria that did not apply—were asked to use GAO surrogate 

criteria.4 

2

To be considered “disadvantaged” in Utah, a community’s median adjusted gross income 

must be equal to or less than 80 percent of the state’s median adjusted gross income. 

3

In total, 591 of the systems in EPA’s sample were located in the 50 states. The others were 

in Puerto Rico and the U.S. Virgin Islands. 

4

For the purpose of this analysis, we established surrogate criteria; to qualify as 

“disadvantaged,” a community’s water rates would have to exceed 1.4 percent of its median 

household income. 

Page 34 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix I: Efforts to Determine the Universe 

of Water Systems Eligible for DWSRF 

Disadvantaged Assistance 

In total, we obtained information on a portion of EPA’s sample 

representing 24,334 systems, or nearly 55 percent of the 44,373 small 

community water systems in the United States. On the basis of EPA’s 

sample and the states’ determinations, we estimated that 6,925 systems, or 

about 28 percent of the 24,334 small systems reflected in the results of our 

survey, qualified as “disadvantaged.”

5 However, the high non-response 

rate associated with this analysis precluded us from obtaining information 

on the systems representing the remaining 45 percent of the universe. As a 

result, we could not determine whether the actual percentage of systems 

that would qualify as disadvantaged matched our findings. Specifically, we 

had no way of determining whether the systems for which we had 

information were systematically different from those systems for which 

we lacked information in a way that would make the percentage of 

disadvantaged communities higher or lower than what would be found in 

the universe as a whole. 

Our effort met with limited success for several reasons. The primary 

reason was that some states did not have the information necessary to 

readily make a determination about a system’s disadvantaged status or 

they lacked the time and resources to collect the information for us. Also, 

as noted earlier, EPA did not determine the level of uncertainty, or 

sampling error, in its needs estimate. Because of EPA’s sampling strategy, 

traditional methods for estimating sampling error cannot be used, and 

developing an accurate measure of the precision of any estimate for small 

systems would prove challenging at best. As a result, we cannot draw any 

conclusions about the precision of our estimate of water systems that 

qualify for assistance to disadvantaged communities.6 

5

Another way of looking at this is to compare the number of systems estimated to be 

disadvantaged (6,925) with the total number of small systems (44,373). Using this 

approach, we could conclude that the minimum percentage of “disadvantaged” systems 

would be about 16 percent. 

6

EPA’s requirement that systems from every state, Puerto Rico, and the U.S. Virgin Islands 

be included in its sample of small water systems complicated the calculation of the 

sampling error in the needs estimate for these systems. For example, to use the appropriate 

statistical formulas for calculating sampling error, EPA’s sample would have to have 

included systems from at least two geographical areas within each state or territory. 

However, at least 10 states or territories had only one geographical area from which 

systems were sampled. Although statisticians have developed a way to approximate 

sampling error when this situation occurs, using it requires each state with only one 

geographical area to be grouped with a “similar” state. Thus, assumptions must be made 

about which states are similar, and criteria for making such assumptions were not readily 

available. 

Page 35 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix II: GAO’s Survey of State Drinking 

Water Officials Regarding Assistance to 

Disadvantaged Communities 

Page 36 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix II: GAO’s Survey of State Drinking 

Water Officials Regarding Assistance to 

Disadvantaged Communities 

Page 37 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix II: GAO’s Survey of State Drinking 

Water Officials Regarding Assistance to 

Disadvantaged Communities 

Page 38 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix II: GAO’s Survey of State Drinking 

Water Officials Regarding Assistance to 

Disadvantaged Communities 

Page 39 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix II: GAO’s Survey of State Drinking 

Water Officials Regarding Assistance to 

Disadvantaged Communities 

Page 40 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix III: Comments from EPA’s Office of 

Water 

Page 41 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix III: Comments from EPA’s Office of 

Water 

Page 42 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix IV: Comments from EPA’s Office of 

Inspector General 

Page 43 GAO-02-135 EPA’s Drinking Water Revolving Fund 
Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(360001) 

Ellen M. Crocker (617) 565-7469 

Karen Kemper, John Johnson, Lynn Wasielewski, Emma Quach, Karen 

Bracey, Teruni Rosengren, Anna Kelley, Luann Moy, Jonathan McMurray, 

and Karen Keegan made key contributions to this report. 

Page 44 GAO-02-135 EPA’s Drinking Water Revolving Fund 
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