Water Resources: Four Federal Agencies Provide Funding for Rural Water Supply and Wastewater Projects
Published: 2007-09-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: funds for constructing and upgrading water supply and wastewater treatment facilities. As a result, they typically rely on federal grants and loans, primarily from the Rural Utilities Service (RUS), Economic Development Administration (EDA), Bureau of Reclamation (Reclamation), and the U.S. Army Corps of Engineers (Corps), to fund these projects. Concern has been raised about potential overlap between the projects these agencies fund. For fiscal years 2004 through 2006 GAO determined the (1) amount of funding these agencies obligated for rural water projects and (2) extent to which each agency's eligibility criteria and the projects they fund differed. GAO analyzed each agency's financial data and reviewed applicable statutes, regulations, and policies.
section_title: What GAO Found
paragraphs: From fiscal years 2004 through 2006, RUS, EDA, Reclamation, and the Corps obligated nearly $4.7 billion to about 3,100 rural water supply and wastewater projects. RUS obligated the majority of these funds--about $4.2 billion--to about 2,800 projects. Of this $4.2 billion, RUS loans accounted for about $2.7 billion, and RUS grants accounted for about $1.5 billion. EDA, Reclamation, and the Corps, combined, obligated a total of about $500 million in grants to rural communities for about 300 water projects. RUS, EDA, Reclamation, and the Corps fund similar rural water supply and wastewater projects, but they have varied eligibility criteria that limit funding to certain communities based on population size, economic need, or geographic location. RUS, EDA, and the Corps provide funding for both water supply and wastewater projects, while Reclamation provides funding only for water supply projects. Eligible water projects can include constructing or upgrading distribution lines, treatment plants, and pumping stations. RUS and EDA have formal nationwide programs with standardized eligibility criteria and processes under which communities compete for funding. In contrast, Reclamation and the Corps fund water projects in defined geographic locations under explicit congressional authorizations. In 2006 the Congress passed the Rural Water Supply Act, directing Reclamation to develop a rural water supply program with standard eligibility criteria. The Corps continues to fund rural water supply and wastewater projects under specific congressional authorizations, many of which are pilot programs. The Congress required the Corps to evaluate the effectiveness of these various pilot programs and recommend whether they should be implemented on a national basis. The Corps has only completed some of the required evaluations and, in most cases, has not made the recommendations that the Congress requested about whether or not the projects carried out under these pilot programs should be implemented on a national basis.

section_title: Letter
paragraphs: More than 90 percent of public water supply systems and 70 percent of  wastewater systems throughout the United States serve communities with  populations of fewer than 10,000, usually in rural areas. The  Environmental Protection Agency (EPA) estimates that these water supply  and wastewater systems will require about $64 billion in upgrades to meet  federal water quality standards. However, rural areas typically lack  adequate funds for constructing and upgrading water supply and  wastewater treatment facilities. Urban areas can take advantage of  economies of scale by spreading the costs of projects among larger  populations, which rural areas cannot. According to EPA, the per- household cost for water supply and wastewater projects in these areas is  almost four times more than the per-household cost of similar projects in  more urban areas. As a result, communities in rural areas often have to  rely on federal grants and loans to help finance their water supply and  wastewater projects.
As we reported in 2005, while several federal agencies provide funding for  rural water supply and wastewater projects, these projects are primarily  funded by the U.S. Department of Agriculture’s Rural Utilities Service  (RUS), the Department of Commerce’s Economic Development  Administration (EDA), the Department of the Interior’s Bureau of  Reclamation (Reclamation), and the U.S. Army Corps of Engineers  (Corps). Historically, RUS has provided grants and loans to construct or  improve water supply and wastewater facilities in rural areas. Similarly,  EDA has provided grants to economically distressed communities,  including those in rural areas, to revitalize, expand, and upgrade their  physical infrastructure, which includes water supply and wastewater  facilities. In contrast, Reclamation has traditionally funded large water  infrastructure projects to irrigate the arid western states, while the Corps  has primarily funded water-related infrastructure for inland navigation and  flood control purposes. More recently, the Congress has directed  Reclamation and the Corps to provide funding for water supply and  wastewater treatment projects, including some in rural areas, raising  concerns about potential overlap between these projects and those  traditionally funded by RUS and EDA.
In this context, you asked us to determine (1) for fiscal years 2004 through  2006, how much federal funding RUS, EDA, Reclamation, and the Corps  obligated for rural water supply and wastewater projects and (2) to what  extent each agency’s eligibility criteria and the projects they fund differ. In  addition, you asked us to determine, to the extent possible, the total  overhead costs and number of personnel needed to manage rural water  supply and wastewater projects at each agency during fiscal years 2004  through 2006. This information is included in an appendix to this report.
To determine the amount of funding RUS, EDA, Reclamation, and the  Corps provided, we collected and analyzed each agency’s obligations for  rural water supply and wastewater projects during fiscal years 2004  through 2006. To determine the extent to which each agency’s eligibility  criteria and the projects they fund differ, we reviewed and analyzed  applicable statutes, agency regulations, policy guidance, and project  specific data submitted by each agency to us. In addition, we selected a  nonprobability sample of 16 rural water supply and wastewater projects,  including at least one project funded by each of the four agencies, and  interviewed both local officials from the communities sponsoring these  projects and federal agency officials responsible for managing the funding  of these projects. To the extent possible, we also analyzed the amount of  overhead costs and number of personnel necessary to support these  projects at each agency. A more detailed description of our scope and  methodology is presented in appendix I. We performed our work from  September 2006 through August 2007 in accordance with generally  accepted auditing standards.
subsections: section_title: Background
paragraphs: RUS, EDA, Reclamation, and the Corps each have distinct missions and  fund rural water supply and wastewater projects under separate programs  and congressional authorizations. Furthermore, each agency has its own  definition of what constitutes a rural area and a unique organizational  structure to implement its programs. Specifically,    RUS administers the U.S. Department of Agriculture’s rural utilities  programs throughout the country, which are aimed at expanding  electricity, telecommunications, and water and waste disposal services.  RUS provides assistance for water supply and wastewater projects  through its Water and Environmental Program and defines rural areas for  this program as incorporated cities and towns with a population of 10,000  or fewer and unincorporated areas, regardless of population. RUS  manages this program through its headquarters in Washington, D.C., and  47 state offices, each supported by area and local offices.
EDA provides development assistance to areas experiencing substantial  economic distress regardless of whether or not they are rural or urban.  EDA primarily provides assistance for water supply and wastewater  projects in distressed areas through its Public Works and Development  Facilities Program and uses a U.S. Census Bureau definition for rural areas  that is based on metropolitan statistical areas. EDA manages this program  through its headquarters in Washington, D.C., six regional offices, and  multiple field personnel.
Reclamation was established to implement the Reclamation Act of 1902,  which authorized the construction of water projects to provide water for  irrigation in the arid western states. Reclamation generally manages  numerous municipal and industrial projects as part of larger, multipurpose  projects that provide irrigation, flood control, power, and recreational  opportunities in 17 western states, unless otherwise directed by the  Congress. Reclamation provides assistance for water supply projects  through individual project authorizations and defines a rural area as a  community, or group of communities, each of which has a population of  not more than 50,000 inhabitants. Reclamation manages these projects  through its headquarters in Washington, D.C., and Denver, Colorado, five  regional offices, and multiple field offices in the western United States.
The Corps’ Civil Works programs investigate, develop, and maintain water  and related environmental resources throughout the country to meet the  agency’s navigation, flood control, and ecosystem restoration missions. In  addition, the Civil Works programs also provide disaster response, as well  as engineering and technical services. The Corps provides assistance for  water supply and wastewater projects through authorizations for either a  project in a specific location, or for a program in a defined geographic  area, and does not have a definition for rural areas. The Corps administers  its programs and projects through its Headquarters in Washington, D.C.,  eight regional divisions, and 38 district offices.
These agencies rely on several sources of funding—including annual  appropriations from the general fund and from dedicated funding sources,  such as trust funds—to provide financial support for these projects and  programs.
section_title: Four Agencies Obligated about $5 Billion for Rural Water Supply and Wastewater Projects during Fiscal Years 2004 through 2006
paragraphs: RUS, EDA, Reclamation, and the Corps obligated $4.7 billion to 3,104 rural  water supply and wastewater projects from fiscal years 2004 through  2006. Of these obligations, RUS obligated nearly $4.2 billion (or about 90  percent) of the funding—about $1.5 billion in grants and about $2.7 billion  in loans—to about 2,800 projects. EDA, Reclamation, and the Corps  provided a combined $500 million in grants to rural communities for about  300 water supply and wastewater projects. Table 1 shows the number of  projects and the amount of obligations for rural water supply and  wastewater projects by agency for fiscal years 2004 through 2006. Figures  1 through 4 show the location of these rural water supply and wastewater  projects by agency during fiscal years 2004 through 2006.
RUS provided the majority of the funding to the largest number of  projects, while Reclamation provided the largest amount of funding per  project. As table 1 shows, the average RUS grant was approximately  $680,000 per project, while the average Reclamation grant was about $22  million per project. EDA and Corps grants averaged about $1 million and  $800,000 per project, respectively. The average Reclamation grant amount  was significantly larger than the grant amounts provided by the other  agencies because Reclamation provided funding to a relatively small  number of large regional water supply projects that span multiple  communities. For example, during fiscal years 2004 through 2006,  Reclamation obligated nearly $87 million of the about $459 million  estimated total cost for the Mni Wiconi project. This project will provide  potable water to about 51,000 people in rural communities spanning seven  counties and three Indian Reservations. The Mni Wiconi project covers  approximately 12,500 square miles of the state of South Dakota or roughly  16 percent of the state’s total land area. Figure 5 shows the location of the  Mni Wiconi project area.
In contrast, the other three agencies primarily provided funding to  relatively smaller scale projects located in single communities. For  example, Penns Grove, New Jersey, a community with a population of  about 5,000, received an $800,000 EDA grant to upgrade a wastewater  treatment plant with an estimated total project cost of $1.16 million.
Similarly, according to Corps officials, Monticello, Kentucky, a community  with a population of about 6,000, received about $312,500 from the Corps  for two sewer line extensions with total project costs of about $435,000.  This community also received about $1 million from RUS for water and  sewer line upgrades with an estimated total project cost of about $1.4  million.
section_title: Agencies Fund Similar Rural Water Supply and Wastewater Projects, but their Eligibility Criteria Vary
paragraphs: While the types of projects RUS, EDA, Reclamation, and the Corps fund  are similar, varying agency eligibility criteria can limit funding to certain  communities based on their population size, economic need, or geographic  location. Specifically, RUS and EDA have established nationwide  programs with standardized eligibility criteria and processes under which  communities compete for funding. In contrast, Reclamation and the Corps  have historically provided funding to congressionally authorized projects  in certain geographic locations, without standardized eligibility criteria.  Table 2 shows the types of projects each agency funds, the funding  mechanisms they use, and their eligibility criteria.
subsections: section_title: RUS, EDA, Reclamation, and the Corps Fund Similar Rural Water Supply and Wastewater Projects
paragraphs: The rural water projects that RUS, EDA, Reclamation, and the Corps fund  are similar, and all four agencies use similar funding mechanisms. While  Reclamation primarily provides funding for water supply projects, RUS,  EDA, and the Corps fund both water supply and wastewater projects.  These projects primarily include the construction or upgrading of water or  wastewater distribution lines, treatment plants, and pumping stations. For  example, all four agencies funded water line expansions or upgrades in  either residential or commercial areas. RUS, EDA, and the Corps also  funded sewer line extensions into either residential or commercial areas.
section_title: RUS and EDA Have Nationwide Water Supply and Wastewater Programs with Standard Eligibility Criteria
paragraphs: RUS and EDA have established nationwide programs with standardized  eligibility criteria and processes under which communities compete for  funding. Specifically, RUS’ eligibility criteria require projects to be located  in a city or town with a population of less than 10,000 or an  unincorporated rural area, regardless of the area’s population. EDA’s  eligibility criteria require projects to be located in economically distressed  communities, regardless of the size of the community served, and the  project must also create or retain jobs.
subsections: section_title: RUS Only Provides Funding for Water Supply and Wastewater Projects Located in Rural Areas
paragraphs: RUS’ eligibility criteria require water supply or wastewater projects to  serve rural areas. A project must be located in a city or town with a  population of less than 10,000 or in an unincorporated rural area  regardless of the population. For example, St. Gabriel, Louisiana, with a  population of about 6,600, received RUS funding to expand sewer lines to  connect residents to a wastewater treatment plant. Similarly, Laurel  County Water District No. 2, which provides potable water to about 17,000  residents who live in unincorporated rural areas of southeastern Kentucky  between the cities of London, Kentucky, and Corbin, Kentucky, received  RUS funding to upgrade a water treatment plant to accommodate potential  growth opportunities in the area. Table 3 provides the number of RUS  funded rural water supply and wastewater projects by state for fiscal years  2004 through 2006.
To apply for RUS funding for a water supply or wastewater project, a  community must submit a formal application. Once the formal application  is submitted, communities then compete for funding with other projects  throughout the state. In general, RUS officials in the state office rank each  proposed project according to the project’s ability to alleviate a public  health issue, the community’s median household income, and other  factors. As applications are reviewed and ranked on a rolling basis, RUS  officials in the state office generally decide which projects will receive  funding until all funds are obligated for the fiscal year.
RUS provides both grants and loans for eligible projects, and communities  must meet certain requirements depending upon the type of assistance  they are requesting. For example, RUS grants can be used to finance up to  75 percent of a project’s cost based on a number of factors including a  community’s financial need and median household income. Alternatively,  to receive a loan, the community must certify in writing, and RUS must  determine, that the community is unable to finance the proposed project  from their own resources or through commercial credit at reasonable rates  and terms. For projects also funded through RUS loans, RUS requires the  community to charge user fees that, at a minimum, cover the costs of  operating and maintaining the water system while also meeting the  required principal and interest payments on the loan. For example, RUS  provided the Wood Creek Water District, located in Laurel County,  Kentucky, a $1 million grant and a $7.98 million loan for a major water  treatment plant expansion. A Wood Creek official told us that the water  district had attempted to obtain a loan from a commercial lender;  however, the loan would have had an interest rate of 7 percent and a term  of 20 years, which would have rendered the project financially unfeasible.  According to RUS, Wood Creek was able to receive a loan with an interest  rate of 4.3 percent and a term of 40 years, thereby significantly reducing  the annual loan payments. RUS also required Wood Creek to slightly  increase its user fees to support the operation and maintenance of the  water system and cover the loan repayment.
section_title: EDA Provides Funding to Projects in Areas Experiencing Economic Distress
paragraphs: EDA’s eligibility criteria require water supply or wastewater projects to be  located in an economically distressed area, regardless of the area’s  population size. EDA defines an area as economically distressed if it meets  one of the following three conditions: the area has (1) an unemployment  rate that is at least 1 percent greater than the national average, (2) a per  capita income that is 80 percent or less of the national average, or (3) has  experienced or is about to experience a special need arising from changes  in economic conditions. The project must also create or retain long-term  private sector jobs and/or attract private capital investment. For example,  Assumption Parish Waterworks District No.1 in Napoleonville, Louisiana,  received EDA funding to upgrade water service to two sugarcane mills.  The community qualified for the funding because Assumption Parish met  EDA’s criteria for unemployment and per capita income. The water supply  project allowed the sugarcane mills to maintain and expand their  operations, saving 200 existing jobs, creating 17 new jobs, and attracting  $12.5 million in private investment. Table 4 provides the number of EDA  funded rural water supply and wastewater projects by state for fiscal years  2004 through 2006.
To apply for EDA funding for a water supply or wastewater project, the  community must submit a preapplication to an EDA Regional Office. If the  proposed project is found eligible, the community must then submit a  formal application to an EDA Regional Office. The Regional Office then  prioritizes and makes funding decisions that are forwarded to EDA  headquarters for approval. These decisions are based upon, among other  things, how the project promotes innovative, entrepreneurial, or long-term  economic development efforts. EDA applications are reviewed on a rolling  basis, and funding decisions are made until all of the funds for the fiscal  year are obligated.
EDA provides grants for eligible projects that may finance 50 to 100  percent of a project’s total costs based on a number of factors including an  area’s level of economic distress. For example, the London-Laurel County  Industrial Development Authority located in Laurel County, Kentucky,  qualified for an EDA grant because the county has a per capita income of  $14,165, which is 66 percent of the national average. Because Laurel  County’s per capita income was between 60 to 70 percent of the national  average, EDA’s grant could fund no more than 60 percent of the project’s  total cost. The project received a $950,000 grant, which covered 50 percent  of the $1.9 million total project cost to construct water and sewer line  extensions for an industrial park. The new occupants of this industrial  park were expecting to create 425 new jobs and provide $20.9 million in  private investment.
section_title: Reclamation and the Corps Provide Congressionally Directed Funding for Specific Projects, without Standard Eligibility Criteria
paragraphs: Reclamation and the Corps have not historically had rural water supply  and wastewater programs; rather they have provided funding to specific  projects or programs in certain geographic locations under explicit  congressional authorizations. Although the Corps continues to provide  assistance to projects under specific congressional authorizations, many  of which are pilot programs, the Rural Water Supply Act of 2006 directed  Reclamation to establish a rural water supply program with standardized  eligibility criteria.
subsections: section_title: Reclamation Funds Specific Congressionally Authorized Projects and Is Also Establishing a Rural Water Supply Program
paragraphs: Reclamation provides grants to individual rural water supply projects in  eligible communities for which the Congress has specifically authorized  and appropriated funds. These grants finance varying amounts of a  project’s total costs depending upon the specific authorization. According  to a program assessment conducted by the Office of Management and  Budget (OMB), the Congress has chosen Reclamation to fill a void for  projects that are larger and more complex than other rural water projects  and which do not meet the criteria of other rural water programs. For  example, the Mni Wiconi Project Act of 1988, as amended, directs  Reclamation to provide funding to three Indian tribes and seven counties  for a rural water supply project in South Dakota that encompasses 16  percent of state’s total land area. For the Mni Wiconi project, Reclamation  grants provide funding for 100 percent of the project costs on Indian lands  and 80 percent of the project costs on non-Indian lands. Table 5 provides  the number of Reclamation funded rural water supply projects by state for  fiscal years 2004 through 2006.
While rural water supply projects are outside of Reclamation’s traditional  mission, according to Reclamation officials, the agency became involved  in such projects because individual communities or groups of  communities proposed projects directly to the Congress. In response, the  Congress created specific authorizations for these rural water supply  projects, and Reclamation was designated responsibility for funding and  overseeing the construction of the projects. Because Reclamation is  responding to Congressional direction in implementing these projects, it  has not established eligibility criteria for communities or prioritized these  projects for funding. In a May 11, 2005 testimony, the Commissioner of the  Bureau of Reclamation indicated that the agency would like more  authority to plan and oversee the development and construction of rural  water supply projects.
In 2006, the Congress passed the Rural Water Supply Act directing  Reclamation to develop a rural water supply program. Within 1 year,  Reclamation was required to develop standardized criteria to determine  eligibility requirements for rural communities and prioritize funding  requests under this program. Further, the act directed Reclamation to  assess within 2 years how the rural water supply projects funded by  Reclamation will complement those being funded by other federal  agencies. Reclamation is now beginning to address these requirements,  including: (1) developing programmatic criteria to determine eligibility for  participation and (2) assessing the status of authorized rural water supply  projects and other federal programs that address rural water supply  issues. According to a Reclamation official, the agency plans to complete  these requirements by August 2008 and December 2008, respectively.  Reclamation officials also said the development of a rural water supply  program will, among other things, allow Reclamation to be directly  involved in the planning, design, and prioritization of rural water supply  projects and provide recommendations to the Congress regarding which  projects should be funded for construction. Projects recommended for  funding by Reclamation must still receive a specific congressional  authorization for design and construction.
section_title: The Corps Funds Congressionally Authorized Projects, Usually through Pilot Programs
paragraphs: The Corps funds rural water supply and wastewater projects under  specific congressional authorizations, many of which are pilot programs,  and makes funding available to specific communities or programs in  certain geographic areas. For example, a section of the Water Resources  Development Act of 1999, as amended, authorized a pilot program that  directed the Corps to provide funding to water supply and wastewater  projects to communities in Idaho, Montana, rural Nevada, New Mexico,  and rural Utah. When directed to fund these types of projects, the Corps  provides either grants or reimbursements for project costs incurred by the  community. To receive reimbursements, a community submits invoices  received from its contractors to the Corps, and the Corps generally  reimburses the community up to 75 percent of project costs. Table 6  provides the number of Corps funded rural water supply and wastewater  projects by state for fiscal years 2004 through 2006.
Even though the Corps provides congressionally directed funding to  specific geographic areas through these pilot programs, eligibility criteria  and the degree to which projects compete for funding can differ between  programs. For example, the Corps’ Southern and Eastern Kentucky  Environmental Improvement Program is available only to communities  located in 29 counties in southeastern Kentucky. The program requires  these communities to submit formal applications, which are prioritized  and ranked annually against all received applications. The Corps, in  conjunction with a nonprofit organization, selects projects for funding  based on certain factors such as economic need. For example, the Wood  Creek Water District submitted a formal application and received  approximately $500,000 in reimbursements––about 72 percent of the total  project costs––to extend sewer service to a school and 154 households  who live near the school. In contrast, the Corps’ Rural Utah Program is  available to communities in 24 counties and part of another county that  the Congress designated as rural. This program requires communities in  these counties to submit a request letter that includes, among other things,  a brief project description and an estimate of total project costs. Request  letters are considered for funding on a rolling basis by Corps officials, and  no other formal eligibility criteria exist. For example, Park City, Utah,  submitted a letter that provided a project description and the estimated  total cost for the project. According to a Corps official, the Corps  evaluated the letter and provided approximately $300,000 in  reimbursements––or about 60 percent of the total project costs––for the  replacement of water and sewer lines in Park City’s Old Town area.
While the Corps funds projects carried out under these pilot programs as  directed by the Congress, it does not request funds for them as part of its  annual budget process because, according to Corps officials, these types  of projects fall outside the Corps’ primary mission of navigation, flood  control, and ecosystem restoration. This position was reiterated in a May  11, 2007, policy document released by OMB, which stated that funding of  such local water supply and wastewater projects is outside of the Corps’  mission, costs taxpayers hundreds of millions of dollars, and diverts funds  from more meritorious Corps Civil Works projects.
When the Congress authorized the Corps to fund these various pilot  programs, it also required the agency to evaluate the effectiveness of  several of them and recommend to the Congress whether these pilot  programs should be implemented on a national basis. The Corps has  completed 9 of the 12 required evaluations. Of the completed evaluations,  only four made recommendations––all in favor of the establishment of a  national program. The other five evaluations either did not make the  required recommendation or stated that the agency had not yet funded  enough projects to effectively evaluate the program. However, we found  that between fiscal years 2004 and 2006, the Corps provided funding to  over 100 rural water supply and wastewater projects under pilot programs,  and it is unclear why the Corps has still not completed all of the  evaluations required by the Congress. In the absence of the outstanding  evaluations and recommendations, the Congress does not have  information on whether, collectively, the projects carried out under the  Corps’ pilot programs merit continued funding, duplicate other agency  efforts, or should be implemented on a national basis.
section_title: Conclusions
paragraphs: The Congress has determined that RUS, EDA, and now Reclamation  should provide funding for rural water projects as part of their overall  missions and target federal assistance to certain communities based on  their population size, economic need, or geographic location. However, for  the Corps, the Congress has not yet determined whether funding of rural  water supply projects should permanently be included within the agency’s  water portfolio. To help inform congressional decision making on this  issue, the Corps was required to evaluate its various water supply and  wastewater pilot programs and recommend to the Congress whether these  programs should be continued. However, the Corps has not consistently  provided the information required by the Congress even though it has  completed over 100 rural water projects under various pilot programs. As  a result, the Congress does not have the information it needs to determine  whether the Corps’ projects meet a previously unmet rural water need or  duplicate the efforts of other agencies. Such information is important for  making decisions on how to allocate limited federal resources in a time  when the nation continues to face long-term fiscal challenges.
section_title: Recommendation for Executive Action
paragraphs: To ensure that the Congress has the information it needs to determine  whether the Corps should continue to fund rural water supply and  wastewater projects, we recommend that the Secretary of Defense direct  the Commanding General and the Chief of Engineers of the U.S. Army  Corps of Engineers to provide a comprehensive report on the water supply  and wastewater projects that the Corps has funded under its pilot  programs and determine whether these pilot programs duplicate other  agency efforts and should be discontinued, or whether these pilot  programs address an unmet need and should be expanded and made  permanent at a national level.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided the Departments of Agriculture, Commerce, Defense, and the  Interior with a draft of this report for review and comment. The  Department of Defense concurred with GAO’s findings and  recommendation, and its written comments are included in appendix III.
The Department of the Interior also agreed with GAO’s findings, and its  written comments are included in appendix IV. The Departments of  Agriculture and Commerce provided us with technical comments, which  we have incorporated throughout the report, as appropriate.
We will send copies of this report to interested congressional committees;  the Secretaries of Agriculture, Commerce, Defense, and the Interior; and  other interested parties. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff has any questions about this report, please contact me  at (202) 512-3841, or Mittala@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine how much federal funding the U.S. Department of  Agriculture’s Rural Utilities Service (RUS), the Department of Commerce’s  Economic Development Administration (EDA), the Department of the  Interior’s Bureau of Reclamation (Reclamation), and the U.S. Army Corps  of Engineers (Corps) obligated for rural water supply and wastewater  projects for fiscal years 2004 through 2006, we collected and analyzed  obligation and project location data submitted by each agency. We  determined that the data were sufficiently reliable for the purposes of this  report. To identify water supply and wastewater projects that were located  in rural areas, we applied the definition of rural used by RUS, EDA, and  Reclamation to the geographic location each agency provided for its water  supply and wastewater projects. Because the Corps does not have a  definition for rural areas, we asked the Corps to use the U.S. Census  Bureau’s density-based urban and rural classification system to identify  projects that it funds in rural areas. This classification system divides  geographical areas into urban areas, urban clusters, and nonurban areas  and clusters. Using this information, we determined that Corps funded  water supply and wastewater projects were in rural areas if they were  located in: (1) any nonurban areas or clusters, (2) urban clusters with a  population of less than 20,000, and (3) areas of Nevada and Utah that the  Congress specifically defined as rural in the Water Resources  Development Act of 1999, as amended. Table 7 provides the definition of  rural area used by each agency for water supply and wastewater projects.
To determine the extent to which each RUS, EDA, Reclamation, and the  Corps eligibility criteria and the projects they fund differed, we reviewed  and analyzed applicable statutes, agency regulations, and policy guidance.  In addition, we used a nonprobability sample to select 16 rural water  supply and wastewater projects, including at least one project funded by  each of the four agencies, and conducted site visits to each of the selected  projects. These projects were selected based upon project type (water  supply or wastewater), geographic location, type of assistance (loan,  grant, or a combination of these) and the federal agency funding the  project. During the site visits, we interviewed local officials from the  communities receiving funding and federal agency officials responsible for  managing the funding of those projects. We also collected and analyzed  project-specific documentation such as applications and letters of intent.  Table 8 lists the 16 projects we selected for site visits and the type of  project, location, type of assistance, and funding agency(ies) for each  project.
To determine the overhead costs and number of personnel needed to  support rural water supply and wastewater projects, we collected and  analyzed agency policy guidance and interviewed agency officials to  determine the extent to which RUS, EDA, Reclamation, and the Corps  tracks these data for rural water supply and wastewater projects. We also  requested these data from each agency to the extent they could provide  them to us.
We conducted our work from September 2006 through August 2007 in  accordance with generally accepted auditing standards.
section_title: Appendix II: Agency Overhead Cost Information, Fiscal Years 2004 through 2006
paragraphs: The U.S. Department of Agriculture’s Rural Utilities Service (RUS), the  Department of Commerce’s Economic Development Administration  (EDA), the Department of the Interior’s Bureau of Reclamation  (Reclamation), and the U.S. Army Corps of Engineers (Corps) each  calculate their overhead costs, commonly referred to as general and  administrative (G&A) costs, and the number of personnel needed to  manage rural water supply and wastewater projects, referred to as full- time equivalents (FTE), differently. This appendix describes how each  agency calculates these costs for rural water supply and wastewater  projects.
RUS and EDA each receive separate appropriations to fund their  agencywide G&A costs. These agencies do not track these costs or FTEs  on a project-by-project basis. Therefore, we were unable to calculate each  agencies total G&A costs and total FTEs by rural water supply and  wastewater project.
subsections: section_title: Reclamation
paragraphs: Reclamation divides water supply project costs into two categories, direct  costs and indirect costs. According to Reclamation, if all activities are  correctly and consistently charged, then all activities assigned to indirect  costs can be considered overhead costs for a project. Although a standard  formula is used to determine indirect cost rates, which are applied as a  percentage of labor, Reclamation officials stated that the rates may vary by  area office and region depending primarily on the amount of costs that can  be charged directly to a project. Furthermore, according to documentation  provided by Reclamation officials, these indirect cost rates were updated  each fiscal year. As can be seen in table 9, Reclamation provided the  following indirect costs and FTE estimates for the 11 rural water projects  for which Reclamation obligated funds for fiscal years 2004 through 2006.
section_title: Corps
paragraphs: The Corps’ G&A costs for its headquarters and divisions are funded  through a general expenses appropriation. G&A costs at the district level  are distributed to projects and programs through the use of predetermined  rates established by the district Commander at the beginning of each fiscal  year and are automatically distributed to specific projects or programs  based on the direct labor charged to the projects or programs.
There are two types of overhead costs charged by the districts, general  and administrative overhead and departmental overhead. General and  administrative overhead includes administrative and support costs  incurred in the day-to-day operations of a district. Departmental overhead  includes costs incurred within technical divisions at the district  headquarters that are not attributable to a specific project or program.  While a standard formula is used to determine overhead rates, these rates  may vary by district depending on a variety of factors including,  geographic location—an office in a high cost area will cost more to  operate than a similar office in a rural area, and composition of the  workforce—an office staffed by senior-level employees will cost more to  operate than an office staffed by junior-level employees.
The Corps G&A costs and FTE data for its water supply and wastewater  projects are calculated at the program level and cover projects in both  rural and urban areas. The Corps could not readily provide these data for  obligations on a rural water supply and wastewater project basis.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: Comments from the Department of the Interior
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Ed Zadjura, Assistant Director;  Patrick Bernard; Diana Goody; John Mingus; Lynn Musser; Alison O’Neill;  Matthew Reinhart; and Barbara R. Timmerman made significant  contributions to this report.