Clean Water: How States Allocate Revolving Loan Funds and Measure Their Benefits
Published: 2006-06-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Communities will need hundreds of billions of dollars in coming years to construct and upgrade wastewater treatment facilities, sewer systems, and other water infrastructure. To finance these efforts, they will rely heavily on low-interest loans from the Environmental Protection Agency's (EPA) Clean Water State Revolving Fund (CWSRF) program to supplement their own funds. Through fiscal year 2005, states have used their CWSRFs to provide communities over $52 billion for a variety of water quality projects. The Clean Water Act allows states to use their CWSRFs to (1) construct or improve conventional wastewater infrastructure, (2) control diffuse (nonpoint) sources of pollution such as agricultural runoff and leaking septic systems, and (3) protect federally-designated estuaries. Given the states' flexibility in determining how to spend CWSRF dollars, GAO was asked to examine (1) the extent to which states use their CWSRF dollars to support conventional wastewater treatment infrastructure versus other qualifying expenses, (2) the strategies states use to allocate their CWSRF dollars among qualifying expenses, and (3) the measures states use to ensure that their allocation strategies result in the most efficient and effective use of CWSRF dollars. EPA reviewed a report draft, providing technical comments that were incorporated.
section_title: What GAO Found
paragraphs: Since 1987, states have used 96 percent (about $50 billion) of their CWSRF dollars to build, upgrade, or enlarge conventional wastewater treatment facilities and conveyances. Projects to build or improve wastewater treatment plants alone account for over 60 percent of this amount, with the remainder supporting the construction or rehabilitation of sewer and storm water collection systems. CWSRF assistance for nonpoint source activities represents only 4 percent (about $2 billion) of CWSRF dollars, although it accounts for over a quarter of all CWSRF projects financed. To date, 37 states report using some portion of their CWSRF funds to directly support nonpoint source activities. Nationwide, 23 percent of CWSRF funds (64 percent of all CWSRF loan agreements) were devoted to water quality projects in communities with populations of less than 10,000 people. The 50 states (and Puerto Rico) have used a variety of strategies to allocate CWSRF funds to meet their individual needs. For example, the state of Washington sets aside 20 percent of its CWSRF dollars to support nonpoint source projects, while Alabama state law defines only traditional public wastewater treatment facilities as appropriate projects under its CWSRF program. Other states have designed their programs to target selected types of borrowers. Pennsylvania, for example, has targeted borrowers in small or rural communities during the allocation process. According to EPA and state officials, states' allocation strategies may change as certain states' priorities and clean water needs shift. Among the reasons are (1) aging wastewater infrastructure in need of rehabilitation or replacement; (2) population growth and redistribution; (3) changes in EPA enforcement priorities; and (4) stricter EPA and state water quality standards for temperature, nutrients, and sediments. EPA and the states use a uniform set of financial and environmental measures to help determine efficient and effective use of CWSRF resources. Financial measures include, among others, return on federal investment, the pace at which available funds are loaned, and the sustainability of the fund. EPA regional officials conduct annual reviews of each state program to help ensure the fiscal integrity of the state programs. All programs are also subject annually to independent financial audits. To measure environmental outcomes of CWSRF-funded projects, in fiscal year 2005, EPA developed an electronic benefits reporting system that all 51 programs have agreed to use. Currently, the system collects data only on anticipated environmental benefits associated with CWSRF-funded projects. However, to varying degrees, some states such as Oklahoma and Washington are attempting to gather data on actual environmental benefits from their CWSRF-funded projects, including nonpoint source projects.

section_title: Letter
paragraphs: Recent estimates by the Environmental Protection Agency (EPA) and the  Congressional Budget Office suggest that, over the next 15 years, local  communities will need hundreds of billions of dollars to construct and  upgrade aging wastewater treatment facilities, sewer systems, and other  projects that improve water quality and help safeguard public health and  the environment. These communities will rely on EPA’s Clean Water State  Revolving Fund (CWSRF) to supplement the funds they obtain from their  ratepayers to finance these efforts. The Water Quality Act of 1987  amended the Clean Water Act and created the CWSRF program to provide  an independent, permanent, low-cost source of financing for a wide range  of efforts to protect or improve water quality. Through the CWSRF, EPA  provides annual grants to the states to capitalize state-level CWSRFs.  States must match these EPA grants with a minimum of 20 percent of their  own contributions. States loan their CWSRF dollars to local governments  and other entities for various water quality projects, and loan repayments  are cycled back into the state-level programs to fund additional projects.  According to the EPA, all 50 states and Puerto Rico currently maintain  revolving loan funds that have provided an average of over $4 billion in  total annual assistance since 2000. From fiscal years 1987 through 2005,  state CWSRFs have provided over $52 billion and made over 16,000 loans  for a variety of water quality projects.
The CWSRF provides states with significant flexibility to design programs  to meet their water quality needs. States may use their CWSRF resources  to (1) construct or improve conventional wastewater infrastructure, such  as treatment plants and sewer systems; (2) control diffuse, or “nonpoint”  sources of pollution, such as runoff from agricultural activities and leaking  septic systems; and (3) develop or implement management plans in  federally-designated estuaries. Although the CWSRF is primarily a low- interest loan program, states can also use it to refinance, purchase, or  guarantee local debt and purchase bond insurance. States may customize  their loan terms, including interest rates (from 0 percent to market rates)  and repayment periods (up to 20 years), depending on the financial and  environmental needs of potential borrowers. EPA provides a range of  financial and programmatic training and direct technical support to the  states through its regional offices.
Citing the states’ flexibility in determining how to use their CWSRFs, you  asked that we examine (1) the extent to which states are currently using  their CWSRF dollars to support conventional wastewater treatment  infrastructure versus other qualifying expenses, (2) the strategies states  use to allocate their CWSRFs among qualifying expenses, and (3) the  measures states use to ensure that their allocation strategies result in the  most efficient and effective use of their CWSRFs.
To determine the extent to which states are currently using their CWSRFs  to support conventional wastewater infrastructure versus other qualifying  expenses, we reviewed EPA’s National Information Management System,  the database EPA uses to track expenditures for all 51 CWSRF programs.  To examine the strategies states use to allocate their CWSRFs among  qualifying expenses, we interviewed EPA and state-level agency officials  and reviewed annual reports and other official documents. We conducted  field visits to a diverse group of states—including Delaware, Minnesota,  Montana, North Carolina, Ohio, Texas, and Washington—to obtain  detailed illustrative information about CWSRF allocation strategies from  state-level CWSRF program officials and selected recipients of CWSRF  funds. To gather information on additional states, we conducted  structured phone interviews with EPA officials from all 10 regional offices  and followed up with selected state-level CWSRF program officials to  discuss allocation strategies and other aspects of their programs. We also  reviewed each state’s most recent CWSRF Program Evaluation Report  (PER), which EPA conducts annually. To examine how states ensure that  their allocation strategies result in the most efficient and effective use of  CWSRF dollars, we interviewed EPA and state officials about the financial  and environmental measures they use to assess CWSRF performance. In  addition, we reviewed EPA’s online CWSRF Environmental Benefits  Reporting System. We conducted our work between July 2005 and April  2006 in accordance with generally accepted government auditing  standards. See appendix I for a more detailed discussion of our scope and  methodology.
subsections: section_title: Background
paragraphs: Local governments have primary responsibility for wastewater treatment,  owning and operating more than 17,000 treatment plants and 24,000  collection systems nationwide. Local ratepayers have long been relied  upon to fund both construction costs and operating and maintenance  costs associated with facilities serving their communities. However, the  federal government has provided financial assistance for these wastewater  treatment facilities since the enactment of the Water Pollution Control Act  Amendments of 1956, which established the federal Construction Grants  program. Through this program, the federal government provided grants  directly to local governments for constructing treatment facilities but  limited the federal contribution to the lesser of 30 percent of eligible  construction costs or $250,000. The Federal Water Pollution Control Act  Amendments of 1972, commonly known as the Clean Water Act, increased  the federal share of costs to 75 percent. According to the Congressional  Budget Office, federal outlays for wastewater treatment grants rose  tenfold during the 1970s, reaching a high of $8.4 billion in 1980.  Subsequent amendments in 1981 and 1987 reduced and then phased out  the construction grant program, replacing it with the CWSRF. Instead of  providing grants directly to localities, the CWSRF provides federal grants  to the states, which in turn provide loans to communities and other  entities to finance wastewater treatment and other water quality projects.  The 1987 law established a system in which the states would use the loan  repayments to finance future CWSRF loans, thereby allowing the state  revolving funds to operate without sustained federal support. Congress  authorized appropriations through 1994 but has continued to appropriate  funds to the CWSRF each year since.
The transfer of federal funds to state-level CWSRFs begins when Congress  appropriates funds annually to the EPA. EPA then allots capitalization  grants to the individual states. The Clean Water Act also requires states to  provide state funds to match 20 percent of the total federal CWSRF  capitalization grants. To receive its allotment, a state must provide an  Intended Use Plan that lists potential projects to solve water quality  problems and solicit public comments on that list. After completing the  plan and receiving its capitalization grant, a state has up to 1 year to enter  binding commitments (later converted into loan agreements) with  potential borrowers to fund specific water quality projects. The majority of  CWSRF borrowers are municipalities and other local units of government,  although in some states nonprofit organizations, businesses, farmers,  homeowners, and watershed groups are eligible to seek nonpoint source  funding through the CWSRF.
According to an EPA headquarters official, a single CWSRF loan may  support multiple clean water projects. State CWSRF administrators set  loan terms, interest rates, and repayment periods. Loan repayments are  cycled back into the state-level fund and used for additional water quality  projects. States also have the option of using CWSRF funds as collateral to  borrow in the public bond market to increase the pool of available funds, a  process referred to as “leveraging.” Figure 1 illustrates the flow of funds  through the CWSRF program.
States can use their CWSRF resources to construct or upgrade wastewater  infrastructure, address nonpoint sources of pollution, or develop or  implement management plans in federally-designated estuaries. States use  a state-developed, EPA-approved, ranking system to direct funds to the  highest priority projects. The ranking system considers applicant  communities’ current regulatory compliance status, imminent public and  environmental health threats, and the relative importance of the affected  bodies of water. States are not required to fund these projects in priority  order; decisions on which projects to fund first are often based on a  project’s readiness to proceed. However, states must first use their  CWSRFs to ensure that existing wastewater treatment facilities are in  compliance with, or are making progress toward, deadlines, goals, and  requirements of the Clean Water Act. After meeting this “first use”  requirement, states may use their CWSRFs to construct other wastewater  infrastructure or for nonpoint source pollution and estuary management  projects.
section_title: States Have Loaned 96 Percent of Their CWSRF Funds for Wastewater Infrastructure, with 23 Percent Supporting Projects in Small Communities
paragraphs: Taken together, states have loaned the majority of their CWSRF dollars — 96 percent or about $50 billion since 1987—to build, upgrade, or enlarge  conventional wastewater treatment facilities and conveyances. Direct  CWSRF support for nonpoint source activities represents only 4 percent of  CWSRF dollars (about $2 billion), although it accounts for over a quarter  of all CWSRF projects financed. Nationwide, 23 percent of CWSRF funds  (64 percent of all CWSRF loan agreements) were devoted to water quality  projects in communities with populations of less than 10,000 people.
subsections: section_title: States Have Used about 96 Percent of Their CWSRFs to Support Conventional Wastewater Infrastructure Projects
paragraphs: All 51 CWSRF programs use the large majority of their CWSRF resources  for conventional wastewater infrastructure projects. From fiscal year 1987  through June 2005, the Clean Water State Revolving Fund program has  provided over $52 billion dollars in financial assistance to local  governments and others for a variety of water quality improvement  projects across the nation. States provided about 96 percent of this  amount—or $50 billion—to municipalities to build, upgrade, or enlarge  conventional wastewater treatment facilities and conveyances. EPA  reports that conventional wastewater infrastructure projects account for  about 73 percent of all CWSRF-funded projects. By their nature,  wastewater infrastructure projects are typically much more expensive to  complete than nonpoint source projects. Figure 2 illustrates the relative  funding for the types of projects receiving CWSRF assistance.
Nonpoint source projects ($2 billion)
Wastewater  treatment projects ($50 billion)
Total CWSRF funding equals $52.7 billion. According to EPA, $600 million of available CWSRF  resources support short-term planning and design activities and, as such, have not yet been allocated  by the states among the qualifying categories of expense. However, EPA expects that these funds  will be allocated (most likely to wastewater infrastructure projects) when rolled into longer-term  construction projects.
Within the conventional wastewater treatment category, states may  allocate their CWSRF resources among the following seven major  categories of projects:    Secondary Treatment includes infrastructure designed to ensure that  wastewater treatment plant effluent meets EPA’s secondary treatment  standards, a requirement of all new and existing wastewater treatment  facilities.
Advanced Treatment includes infrastructure designed to further remove  nutrients and other matter from wastewater treatment plant effluent  beyond secondary treatment standards.
New Sewers includes the construction of new wastewater conveyances— such as collector and interceptor sewers—to carry household and  industrial wastewater to treatment facilities.
Sanitary Sewer Overflow correction includes efforts to prevent the  occasional or incidental discharge of untreated sewage from municipal  sanitary sewer systems that can occur due to inclement weather and  improper maintenance or operation of sewer systems.
Combined Sewer Overflow correction includes efforts to prevent or  mitigate discharges of untreated wastewater from combined sewer  systems, which are designed to collect rainwater runoff, domestic sewage,  and industrial wastewater in the same pipe. Combined sewer systems  were designed in many cities to occasionally discharge excess wastewater  directly to nearby water bodies. However such overflows often pose  significant public health and pollution problems and have become a  national enforcement priority for EPA.
Storm Water Sewers includes both storm water infrastructure and efforts  to plan and implement municipal storm water management programs.
Recycled Water Distribution includes projects to convey recycled water  (i.e., treated wastewater) from treatment facilities to end users such as  golf courses and municipal gray water systems.
As shown in figure 3, nationwide, states have allocated about 60 percent of  their CWSRF wastewater infrastructure dollars for secondary and  advanced treatment projects at wastewater treatment facilities. The  remainder supports sewers and other conveyances.
Since the CWSRF’s inception, the total dollar amounts that states annually  provide for wastewater infrastructure and nonpoint source projects has  increased. However, CWSRF support for wastewater infrastructure has  increased at a greater pace than the amount for nonpoint source projects.  Figure 4 shows that states have used their CWSRFs to finance wastewater   infrastructure projects since 1987 but only began to use them to support  nonpoint source projects in 1990. The annual percentage of the CWSRFs  states allocated to nonpoint source projects peaked in 1996 at about 10  percent.
section_title: Nonpoint Source Projects Represent 4 Percent of CWSRFs but Account for Over 25 Percent of All CWSRF-Supported Projects
paragraphs: Direct CWSRF support for nonpoint source pollution control activities  represents only 4 percent (about $2 billion) of CWSRFs allocated by the  states but accounts for over 25 percent of all CWSRF-supported projects  because nonpoint source projects are typically less expensive than  wastewater infrastructure projects. The extent to which states have used  their CWSRFs to support nonpoint source projects varies. To date, 37  states have reported using some portion of their CWSRF funds to directly  support nonpoint source projects. Among them, Wyoming has allocated  the greatest percentage of funds to nonpoint source projects (44 percent),  while New York has allocated the greatest dollar amount (over $700  million). Figure 5 illustrates the percentage of funding that all 51 programs  have allocated to nonpoint source projects since the CWSRF’s inception.  Detailed state by state figures are provided in appendix II.
To be eligible for CWSRF support, a nonpoint source pollution control  project must help implement a state’s EPA-approved Nonpoint Source  Pollution Management Plan. Each state determines which nonpoint  source pollution control activities are eligible for funding. Nationally, there  are 11 major categories of nonpoint source pollution control projects that  have received CWSRF support:    Agricultural Best Management Practices include projects to reduce water  pollution resulting from activities related to the production of animals and  food crops. Projects can include nutrient management practices for the  storage and disposal of animal waste; techniques to minimize pollution  related to agricultural activities such as grazing, composting, pesticide  spraying, planting, harvesting, fertilizing, and tillage; and irrigation water  management.
Individual/Decentralized Sewage Treatment encompasses the  rehabilitation or replacement of individual septic tanks or community  sewage disposal systems. This category also includes the construction of  collector sewers to transport waste from individual septic systems to a  cluster septic tank or other decentralized facility.
Groundwater-Unknown Source relates to the protection of groundwater  and includes projects to protect wellheads and prevent contamination in  areas where groundwater is replenished.
Storage Tanks include tanks above or below ground designed to hold  petroleum products or chemicals. Projects may include spill containment  systems; the upgrade, rehabilitation, or removal of leaking tanks; and the  treatment of contaminated soils and groundwater.
Sanitary Landfills manages water pollution emanating from landfills and  includes activities such as collection of leachate or on-site treatment,  capping, and closure.
Silviculture includes best management practices related to forestry  activities such as timber harvesting, removal of streamside vegetation,  road construction, and mechanical preparation for the planting of trees.  Eligible activities include preharvest planning, streamside buffers, road  management, and re-vegetation of disturbed areas.
Marina includes water pollution control activities related to boating and  freshwater marinas. Pump-out systems, oil containment booms, and  efforts to minimize discharge of sewage from boats are included in this  category.
Resource Extraction includes pollution control activities related to mining  and quarrying. Projects supported can include the construction of  detention berms and the revegetation of areas affected by mining  activities.
Brownfields include abandoned, idle, and underused industrial sites.  Eligible projects include groundwater monitoring wells, treatment of  contaminated soils and groundwater, capping of contaminated areas to  prevent storm water infiltration, and removal of storage tanks at  brownfields.
Hydromodification relates to the water channel modification, dam  construction, stream bank and shoreline erosion, and wetland or riparian  area protection or restoration. Examples of eligible activities include  conservation easements; shore erosion control; wetland development and  restoration; installation of open, vegetated drainage channels designed to  detain and/or treat storm water; and bank and channel stabilization.
Urban includes activities related to erosion, sedimentation, and discharge  of pollutants (e.g., oil, grease, road salt, toxic chemicals) from  construction sites, roads, bridges, and parking lots.
As shown in figure 6, states have provided the greatest level of nonpoint  source support—almost 40 percent of all CWSRF nonpoint source  dollars—to mitigate contaminated runoff from sanitary landfills.
Although sanitary landfill projects received the largest share of CWSRF  nonpoint source dollars, EPA reports that agricultural best management  practices account for over 55 percent of all CWSRF-supported nonpoint  source projects receiving CWSRF support. Agricultural best management  practices—such as constructing a manure retention pond to control  pollution created by contaminated storm water runoff—are typically less  expensive than other types of nonpoint source projects. EPA also reports  that the construction or repair of decentralized or individualized  wastewater treatment systems (i.e., septic systems) accounted for about  another one-third of all CWSRF-supported nonpoint source projects.
Twelve states have reported to EPA that they have indirectly addressed  nonpoint sources of pollution with projects categorized under wastewater  treatment infrastructure. This may occur, for example, when a state  provides a loan to build a centralized collection system or wastewater  treatment plant to replace failing individual septic systems, which EPA  and the states define as a nonpoint source of water pollution. Because the  solution to the nonpoint source pollution problem is technically a  wastewater treatment facility, EPA considers the expenditure to be in the  wastewater infrastructure category. As detailed in table 1, these 12 states  have devoted at least $650 million of their collective financing for  wastewater infrastructure projects to address nonpoint sources of  pollution.
section_title: Smaller Communities Account for 23 Percent of CWSRF Dollars Loaned, but Over 60 Percent of All CWSRF-Supported Projects
paragraphs: Figure 7 shows that since the inception of the CWSRF program, small  communities—defined by EPA as having less than 10,000 inhabitants— have received about 23 percent of total CWSRF dollars. In contrast, over  60 percent of all CWSRF loan agreements supported projects within these  smaller communities.
Figure 8 shows the considerable degree to which the states vary in the  extent to which their CWSRFs support small communities. It illustrates,  for example, that just over half of the CWSRF programs have provided 30  percent or more of their CWSRF funds for projects in small communities.  Pennsylvania has provided the greatest dollar amount ($914 million), as  well as a high percentage of loans (90 percent) to projects in small  communities. At the other end of the spectrum, California has provided  the lowest CWSRF dollar amount (4 percent) and loans (15 percent) for  projects in small communities.
section_title: States’ Allocation Strategies Reflect Diverse Clean Water Needs and CWSRF Program Goals
paragraphs: Our interviews with state and EPA officials suggest that the diversity  states exhibit in their CWSRF spending reflects the variation in what they  see as their most pressing water quality infrastructure needs, their most  pressing water quality problems, and the degree to which they rely on  CWSRF funds to protect smaller communities. EPA and state officials  predict that, in future years, states are likely to alter their current CWSRF  allocation strategies in response to growing demand and shifting clean  water needs and priorities.
subsections: section_title: Some States Focus on Conventional Wastewater Problems
paragraphs: Some states have focused their CWSRFs on supporting the construction of  wastewater treatment plants and conveyance systems. According to EPA  officials, these states consider wastewater infrastructure needs their  highest CWSRF priority and seek other sources of funding to support  nonpoint source pollution problems and estuary management activities. In  some cases, state legislation restricts the use of CWSRFs for nonpoint  source projects. For example, the legislation that created Alabama’s  CWSRF limits the scope of the program by defining projects that receive  CWSRF funds as traditional public wastewater facilities. Other states have  passed legislation restricting the types of entities that can receive CWSRF  loans. Nevada and Colorado, for example, have limited their CWSRF  borrowers to local municipalities or similar government entities, thereby  excluding private or nongovernmental entities from receiving CWSRF  funds.
Even where state law allows CWSRF funds to be used for nonpoint source  projects, some state CWSRF administrators have told EPA officials that  they are not comfortable with using CWSRF funds for this purpose,  especially when demand for funding for wastewater infrastructure  projects in their states is high. For example, according to officials in EPA’s  New York Regional Office, large parts of Puerto Rico lack basic sewers  and wastewater treatment facilities. Consequently, Puerto Rico’s CWSRF  has focused on these needs. Similarly, according to officials in EPA’s  Kansas City Regional Office, Kansas has focused on wastewater treatment  projects due to high levels of borrower demand for support for these types  of projects.
Some states that are willing and legally able to fund both wastewater  infrastructure and nonpoint source projects have not done so because of  low borrower demand for nonpoint source projects. Officials in EPA’s  Dallas and Atlanta Regional Offices told us that Louisiana, Kentucky, and  New Mexico are willing to fund nonpoint source projects but have not  done so because of a lack of borrower demand. Similarly, North Carolina  and Texas CWSRF officials explained that groups that typically implement  nonpoint source projects often pursue grant money for their projects from  federal, state, or private sources rather than CWSRF loans. CWSRF  officials in states we visited indicated that nonpoint source borrowers are  often reluctant to accept a CWSRF loan because they lack a dedicated  source of revenue to repay it. While wastewater treatment plants can  depend on user rates for loan repayments, nonpoint source borrowers may  not have a readily available or dedicated source of revenue to repay a loan.  As such, these officials suggest that the availability of grants through other  federal- or state-funded programs may affect the level of demand for  CWSRF loans for nonpoint source projects.
section_title: Most States Report Using Some of Their CWSRFs to Support Nonpoint Source Projects
paragraphs: As of June 2005, 37 states reported using some portion of their CWSRF  funds to support nonpoint source projects, up from only 2 states in 1990.  The considerable progress in restoring the nation’s waterways since the  passage of the Clean Water Act is largely attributable to significant efforts  to reduce pollutant levels from point sources of pollution, which are those  that contribute pollutants directly to a body of water from a pipe or other  conveyance. However, EPA reports that one-third of the nation’s assessed  waters still do not meet water quality standards. Recognizing the  considerable role of nonpoint source pollution in these standards  violations, the majority of states have decided to focus at least some  attention on addressing these problems with their CWSRF resources.
EPA has encouraged all states to use a watershed management approach  to solving water quality problems, which according to state and EPA  officials, has increased the number of states addressing nonpoint source  pollution with their CWSRFs. While traditional water quality programs  have focused on specific sources of pollution, such as sewage discharges,  or on specific water resources, such as a river segment or a wetland, a  watershed management approach addresses water quality problems at the  watershed level. According to officials at EPA headquarters and several  regional offices, this approach to water quality management often  highlights the role of nonpoint source pollution in noncompliance issues.  These officials suggested that states using a watershed management  approach are more likely to fund nonpoint source projects with CWSRF  resources. Additionally, CWSRF officials in Ohio and Minnesota told us  that developments in water quality monitoring technologies and expansion  of monitoring efforts have helped their states better identify nonpoint  sources of pollution. According to these officials, the role of nonpoint  source pollution in noncompliance has been “uncovered” over the years as  they have improved monitoring efforts and as point sources of pollution— such as wastewater treatment facilities—are brought into compliance.
Some states have been highly proactive in encouraging use of CWSRF  funds to support nonpoint source projects. For example, in an effort to  ensure that CWSRFs address nonpoint source problems, some states have  passed legislation setting aside a portion of their CWSRFs to be used  exclusively for nonpoint source projects. For example, Washington state  regulations require that CWSRF administrators reserve up to 20 percent of  available funds for nonpoint source pollution control and comprehensive  estuary conservation and management projects.
Other states have developed innovative lending approaches to overcome  some of the barriers to funding nonpoint source projects with CWSRF  resources. To increase the number of nonpoint source borrowers while  minimizing loan transaction costs, some states pass CWSRF loan risks and  loan servicing responsibilities onto third parties. These states have  established pass-through lending or linked-deposit programs, whereby  loans are passed through state agencies, municipalities, or local banks  before reaching the borrower. Minnesota’s CWSRF program, for example,  works with the Minnesota Department of Agriculture to allocate a portion  of its funds to counties, soil and water conservation districts, and others to  help establish minirevolving loan accounts. These local units of  government work with local financial institutions to provide low interest  loans for projects proposed by farmers, rural landowners, and agriculture  supply businesses for projects to implement, among other things,  agricultural best management practices. The local units of government  approve eligible projects and refer borrowers to the local financial  institutions. Using CWSRF funds from the minirevolving loan account, the  bank provides low-interest loans to qualified borrowers. The lending  institution assumes the risk and management responsibility for the loan.  Other states—such as Massachusetts and Missouri—have set up similar  pass-through loan programs to address nonpoint sources of pollution with  CWSRF funds.
To overcome the challenge of finding a dedicated source of repayment for  nonpoint source projects, Ohio’s Water Resource Restoration Sponsor  Program integrates CWSRF support for nonpoint source projects into  loans for wastewater treatment plants. According to Ohio CWSRF  officials, communities seeking a CWSRF loan for a wastewater treatment  facility can receive a discount to the interest payments that would  otherwise be due on their wastewater project loans. After the wastewater  facility loan has been awarded, the amount of the interest discount is  advanced to the community, which then assumes responsibility for  financing the implementation of the associated nonpoint source project. In  return, the community receives a reduction to its wastewater facility loan’s  interest rate of up to 0.2 percent. A community that participates in this  program does not typically implement the nonpoint source project itself.  Rather, it enters into an agreement with an implementing partner, such as  a land trust or a park district. Using the interest discount funds, this  partner develops and implements a nonpoint source project (such as a  plan to restore and permanently protect a waterbody’s aquatic habitat  resources) but does not repay the CWSRF. Instead, the sponsoring  community covers the cost as part if its repayment of its wastewater  facility loan.
According to Ohio officials, the benefit of the state’s program is that water  restoration projects that may not normally receive CWSRF funding are  completed with the help of the wastewater treatment plants. Based in part  on the program’s success, Ohio officials have decided to set aside $15  million of CWSRF resources each year for their Water Resource  Restoration Sponsor Program. A few other states are in the process of  establishing similar sponsorship programs.
section_title: Some States Target Borrowers in Small or Economically Disadvantaged Communities
paragraphs: Just as states vary in the way they allocate CWSRF resources according to  water quality needs, they also vary in the extent to which they target  borrowers in small or economically disadvantaged communities. Smaller  communities may struggle more to raise capital for water quality  infrastructure than larger communities with broader tax and rate bases. In  1992, Congress directed EPA to establish a Small Town Environmental  Planning Task Force to, among other things, advise EPA on how to work  better with small communities. The task force found that technical and  administrative capacity is often severely limited in small towns, which  often lack full-time officials and professional staff. Moreover, the task  force found that small communities tend to have severely limited tax bases  and budgets and, therefore, may not have the necessary credit ratings to  attract capital to finance their wastewater infrastructure. In addition,  infrastructure costs fall disproportionately on small towns because entry- level costs must be distributed over a smaller base.
Recognizing these challenges, some states—such as Montana,  Pennsylvania, and West Virginia—use their CWSRFs to help rural, low- income communities meet required sewage and water quality standards. In  Pennsylvania, almost 90 percent of all CWSRF loan agreements and 75  percent of total funding is directed to projects in small communities.  Several states have set aside a portion of their funds for CWSRF-funded  projects in small or economically disadvantaged communities. For  example, Oregon reserves up to 15 percent of its CWSRF to support  projects in communities with populations of 5,000 or less that are facing  severe water quality problems. According to EPA and state officials, some  CWSRF programs have rules to protect the ability of small communities to  access CWSRF funds. For example, some states such as New York and  Minnesota have placed limits on the amount of CWSRF support any one  borrower—such as a major metropolitan area—can receive in a given  year.
A number of states offer small or economically disadvantaged  communities special assistance when applying for CWSRF loans. For  example, Ohio offers CWSRF loans with (1) a zero percent interest rate to  communities with populations of less than 2,500 and a median household  income of less than $45,000 and (2) a 1 percent interest rate to those with  populations between 2,500 and 10,000 and a median household income of  less than $38,000. West Virginia CWSRF administrators are able to extend  repayment terms up to 40 years to qualified disadvantaged communities to  help make projects more affordable. Kentucky offers special state-funded,  short-term loans to small communities to help them cover expenses  related to obtaining a CWSRF loan. Montana has developed special  outreach and technical assistance programs to help small communities  take advantage of the CWSRF program. Montana officials explained that  many small communities lack the necessary administrative structures to  receive a CWSRF loan or lack the technical expertise to develop  competitive applications for CWSRF loans. The state has contracted with  the Rural Community Assistance Partnership, a nonprofit organization, to  provide technical assistance to rural and small communities to guide them  through the process of developing a competitive application and set up the  necessary administrative structures to receive a CWSRF loan. Officials in  several small Montana communities told us that, without this technical  assistance, they would not have been able to receive the CWSRF loans that  were critical to the financing of their wastewater infrastructure.
section_title: Future State Allocation Strategies Will Likely Reflect Shifting Priorities
paragraphs: According to the EPA and state officials we interviewed, demand for  CWSRF support for both point and nonpoint source projects will grow  considerably in the future, and states will likely alter their CWSRF  allocation strategies in response to shifting clean water needs and  priorities. Among the factors these officials cite in predicting changes in  states’ allocation strategies are (1) aging wastewater infrastructure  needing rehabilitation or replacement; (2) population growth and  redistribution; (3) changes in EPA enforcement priorities, particularly with  regard to limiting sewage discharges during wet weather conditions; (4)  pressure to implement EPA’s TMDL program; and (5) stricter EPA and  state water quality standards for temperature, nutrients, and sediments.
Officials in all 10 EPA regional offices and a number of state officials told  us that the need to repair or replace aging wastewater infrastructure will  be a major driver of future demand for CWSRF resources. These officials  point out that many of the wastewater treatment plants and conveyances  built with federal support in the early 1970s in response to the passage of  the Clean Water Act are now reaching the end of their useful lives. EPA  data indicate that wastewater treatment plants typically have an expected  useful life of 20 to 50 years before they require expansion or rehabilitation.  Wastewater conveyances such as pipes and sewers have life cycles that  can range from 15 to over 100 years. In addition, some wastewater systems  on the East Coast still rely on pipes that are almost 200 years old. Taking  into account the need to repair or replace these aging systems, a 2002  Congressional Budget Office analysis estimated that between 2000 and  2019, $260 to $418 billion will be needed for wastewater infrastructure,  while current spending is approximately $10 billion per year. CBO’s  analysis suggests that the gap between current and needed spending could  be as high as $11 billion per year.
In addition to repairing or replacing existing infrastructure, EPA officials  predict that some states will face increased demand for new wastewater  treatment systems in response to population growth. In addition to overall  population growth, EPA also indicates that the existing U.S. population is  shifting geographically, requiring rapid increases in wastewater treatment  capacity in certain areas. EPA officials indicated that some states in the  West—such as Utah and Nevada—and the South—such as Georgia and  Florida—are already experiencing rapid population growth and  considerable pressure to expand existing treatment capacity. In addition,  EPA officials point out that in the near-term, some states along the Gulf  Coast will have to balance the need for new growth with demand to  replace or repair wastewater infrastructure that was damaged by recent  hurricanes.
In response to recent EPA wet weather policies and enforcement actions,  some state and EPA officials predict that a number of states will  experience increased demand for CWSRF assistance to address combined  sewer overflows (CSO), which are discharges of untreated wastewater  from a combined sewer system. Combined sewer systems collect and  transport both sanitary sewage and storm water runoff in a single-pipe  system to a wastewater treatment facility. Constructed prior to the 1950s,  combined sewer systems exist in primarily older, urban communities in  the Northeast, Middle Atlantic, Midwest, and Northwest. An overflow  typically occurs when the total wastewater and storm water flow exceeds  the capacity of the system and, by design, discharges directly into a  receiving water body. Pollutants in CSOs have been shown to be a major  contributor to nonattainment of water quality standards and may pose  significant public health and pollution threats. As such, EPA has selected  these problems as national enforcement priorities. Sixty percent of the  more than 9,000 combined sewer systems nationwide serve communities  of fewer than 10,000 people—-the very communities that face some of the  most difficulty in raising capital to address environmental infrastructure.  States have already used almost $5 billion of CWSRF funds to correct  CSOs, and EPA recently reported to Congress that an additional $50 billion  is required nationwide. Officials in some Midwestern states—such as  Michigan and Minnesota—predict that addressing CSOs will be one of the  biggest drivers of demand and that funding these projects will become a  higher priority in the future. According to officials in EPA’s Chicago and  Atlanta Regional Offices, some states facing major CSO problems—such  as Indiana and Kentucky—have indicated that the CWSRF will be a  primary source of funding for their long-term CSO management plans.
State and EPA officials also point out that demand for CWSRF support for  nonpoint source pollution control projects is likely to grow as states begin  projects to bring impaired waters into compliance with EPA’s TMDL  program. A TMDL is a calculation of the total maximum amount of a  pollutant that a body of water can receive each day and still meet water  quality standards. Water quality standards are set by states, territories,  and tribes and identify the uses for each body of water such as drinking  water supply, contact recreation (swimming), and aquatic life support  (fishing). States generally determine if a body of water is meeting  standards by comparing monitoring data with applicable state water  quality criteria. If the body of water fails to meet applicable federal, state,  or local water quality, then the state is required to list that water as  impaired. EPA guidance provides that the state should then develop a  TMDL implementation plan that specifies reductions necessary to achieve  the standard and then eventually implement a cleanup plan. According to  EPA guidance, the state implementation plan should specify which  pollution sources will be restricted to meet water quality standards. State  and EPA officials indicate that a majority of standards violations relate to  nonpoint sources of pollution and, subsequently, a number of TMDL  projects address nonpoint sources of water pollution. For example,  Minnesota CWSRF officials told us that they believe 86 percent of the  pollution in their impaired waters emanates from nonpoint sources of  pollution. According to some state and EPA officials, many states are  considering the CWSRF as a major source of funding, given the amount of  resources and the overall costs of implementing the plans.
In a similar vein, EPA and state officials also pointed out that stricter  federal, state, and local water quality standards will continue to drive up  demand for CWSRF loans for both point and nonpoint source projects. For  example, according to officials in EPA’s Philadelphia Regional Office,  stricter biological and nutrient standards in the recent Chesapeake Bay  Agreement will drive demand for CWSRF loans in Mid-Atlantic states.  Officials in Minnesota told us they are experiencing a surge in demand for  CWSRF loans to repair or replace individual failing septic systems due to  greater attention and more stringent enforcement by state and county  regulators. EPA officials in EPA’s Seattle Regional Office point out that  efforts to protect the region’s endangered salmon and bull head trout  through the Endangered Species Act may force wastewater treatment  plants to upgrade their treatment efforts and local municipalities to  address nonpoint sources of pollution. These officials predict that tougher  temperature and sediment standards in waters receiving effluent will drive  demand, especially for nonpoint source projects, in states such as  Washington, Idaho, and Oregon.
section_title: EPA and the States Use Specific Financial and Environmental Measures to Evaluate Efficient and Effective Use of CWSRF Resources
paragraphs: EPA and the states use a uniform set of financial and environmental  measures to help determine efficient and effective use of CWSRF  resources. EPA and state-level officials rely on three measures to assess  financial performance, including a set of national financial indicators, an  annual Program Evaluation Report conducted by the cognizant EPA  regional office for each state CWSRF program, and an annual independent  financial audit of the state program. Efforts to measure the environmental  benefits of states’ CWSRFs are relatively new and generally center on  EPA’s recently developed electronic Environmental Benefits Reporting  System.
subsections: section_title: EPA Uses Three Measures of States’ CWSRF Financial Performance to Ensure Efficient and Effective Use
paragraphs: Since the CWSRF program’s inception, all states have used similar  measures to evaluate CWSRF financial performance. The first measure,  EPA’s National Financial Indicators, consists of five individual national  financial indicators. According to an EPA headquarters official responsible  for these indicators, the agency developed these indicators in conjunction  with the states to provide a balanced approach to understanding the  different objectives of CWSRF financial performance. According to a  senior EPA headquarters official, CWSRF project-summary information,  reported by the states in the National Information Management System, is  used to calculate the indicators on a state by state and national level. The  indicators include the following:    Return on Federal Investment estimates how many dollars in  environmental investment have been generated for every federal dollar  spent through the program.
Ratio of Executed Loans to Funds Available for Loans (often referred to  as the “pace” at which loans are made) measures the cumulative dollar  amount of executed loan agreements relative to the cumulative dollar  amount of funds available for loans. It is one indicator of how quickly  funds are made available to finance CWSRF eligible projects.
Ratio of CWSRF Loan Disbursement to Executed Loans measures the  speed at which projects are proceeding toward completion by comparing  the cumulative dollar amount of CWSRF loan disbursements with the  cumulative dollar amount of executed loan agreements and expressing  this as a percentage.
Estimated Additional CWSRF Loans Made Due to Leveraging estimates  the dollar amount of additional projects that have been funded, that  otherwise might not have been, had leveraged bonds not been issued. This  is done by comparing the cumulative amount of CWSRF executed loans  with the cumulative amount of funds available after subtracting the net  funds provided by issuing bonds.
Sustainability of the Fund gauges how well the CWSRFs are maintaining  their invested or contributed capital, without making adjustments for loss  of purchasing power due to inflation.
EPA’s second measure to evaluate effective and efficient use of CWSRF  dollars is its annual review and accompanying written PERs conducted by  EPA’s regional offices of each state program. According to the EPA’s  annual review guidance, the review is intended to, among other things (1)  evaluate the success of the state’s performance in achieving goals and  objectives identified in its Intended Use Plan (which identifies the  intended uses of the amounts available to its CWSRF) and the state’s  Annual Report (which describes how the state has met the goals and  objectives of the previous fiscal year as identified by the Intended Use  Plan), (2) determine how the CWSRF is achieving the intent of the Clean  Water Act, (3) assess the financial status and performance of the fund, and  (4) evaluate progress in identifying the environmental and public health  benefits of the program. The review, based on the information collection  and evaluation process, ends with the issuance of the PER.
EPA’s third measure is the annual financial audit. The Clean Water Act  requires the 51 state-level CWSRF programs to undergo these audits to  determine whether the CWSRF financial statements are presented fairly in  all material respects in conformity with Generally Accepted Accounting  Principles (GAAP) and whether the state has complied with the laws,  regulations, and the provisions of CWSRF capitalization grants. The  audit, conducted under the Single Audit Act, focuses on the state’s overall  CWSRF program, rather than individual capitalization grants awarded to  states by EPA. In addition, independent audits are conducted in 43 states  by auditors contracted by the state; EPA’s Office of Inspector General  currently conducts audits for the remaining eight programs.
section_title: EPA and the States Have Recently Started Reporting Environmental Benefits of CWSRF-Funded Projects as a Measure of Efficient and Effective Use of Program Resources
paragraphs: Quantifying an environmental program’s financial transactions is an  inherently more straightforward exercise than quantifying its  environmental benefits. Nonetheless, the EPA Office of Water’s  Environmental Indicator Task Force has been developing environmental  indicators for the CWSRF since at least 1991. This task force, comprised of  federal and state officials, identified obstacles to measuring benefits and  shared ideas for solutions. It attempted to develop key environmental  indicators, such as the number of pounds of pollutants removed from  wastewater treatment plant effluent. However, a number of obstacles  prevented collection of comprehensive environmental benefits  measurements—most notably (1) a lack of baseline environmental data  and (2) technical difficulties in attributing benefits specifically to the  CWSRF. EPA headquarters officials also explained that environmental  monitoring activities are not an allowable use of CWSRF funds, even as an  administrative expense.
Despite these complications, the requirements of the Government  Performance and Results Act and EPA’s own Strategic Plan have long  recognized the need for outcome-based measures for the agency’s  programs. Moreover, according to EPA headquarters officials, recent  reviews by the Office of Management and Budget (OMB) and EPA’s Office  of Inspector General provided further impetus to quantify environmental  outcomes of the CWSRF. In particular, a 2004 EPA Office of Inspector  General report criticized the program for not developing a comprehensive  plan for measuring results and recommended that such a plan be  developed. In a similar vein, OMB’s Program Assessment Rating Tool  (PART) review of the CWSRF cited its inability to link dollar  expenditures with environmental improvements.
In response, representatives of a state-EPA work group and of the  Association of State and Interstate Water Pollution Control Administrators  (assisted by an EPA contractor) developed the Environmental Benefits  Reporting System in July 2005. This system strives to capture anticipated  environmental benefits that are expected to result from CWSRF-funded  projects. The system does not require any environmental monitoring,  focusing instead on anticipated environmental benefits. According to EPA  headquarters officials, all 51 programs have agreed to use the system to  report the environmental benefits of their CWSRF-funded projects and  must report on all loans made from capitalization grants received after  January 1, 2005.
By July 2005, states were able to enter data about anticipated  environmental improvements to bodies of water resulting from CWSRF- funded projects. Unlike the National Information Management System  data, which is submitted by the states each year in the aggregate, the  environmental benefits data is submitted on a per-project basis, at the time  of loan execution. As of February 2006, 42 states have begun using it to  report CWSRF-supported projects, including nonpoint source projects.
Some states are attempting to go beyond EPA’s requirements by gathering  data on actual environmental benefits from their CWSRF-funded projects,  including nonpoint source projects. Washington State, for example,  recently required applicants to monitor the environmental impact of all of  its CWSRF projects 3 to 5 years after project completion. Between 2001  and 2003, Oklahoma conducted water quality monitoring on 19 receiving  streams, both upstream and downstream of CWSRF-funded improvements  to remove pollutants and increase dissolved oxygen in effluent entering  the streams. However, the study could not determine the extent to which  these particular projects improved overall water quality in the streams,  largely because baseline environmental data were unavailable.
Other states are going beyond the minimal requirements of the EPA  system by estimating the degree to which pollution is prevented by  specific CWSRF-funded projects. Delaware CWSRF officials, for example,  explained that since 2000, they have used estimates of the amount of  pollutants a proposed CWSRF project would remove from the waste  stream to develop the state’s Project Priority List. As another example,  according to EPA’s Seattle regional officials, Oregon has begun to award  additional points to CWSRF project applicants (thus increasing the priority  of the project) if they agree to conduct their own environmental  monitoring and evaluation.
As EPA and the states have long known, quantifying environmental  programs’ benefits with any degree of precision is a challenging exercise.  Nonetheless, their efforts to do so regarding the CWSRF are particularly  important, given the sizable investment of both federal and state dollars in  the program.
section_title: Agency Comments and Our Evaluation
paragraphs: EPA reviewed a draft of this report and provided technical comments,  which have been fully incorporated.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date. At that time, we will send copies of this report  to appropriate congressional committees; interested Members of  Congress; the Administrator, Environmental Protection Agency; and other  interested parties. We also will 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.
Should you or your staff need further information, please contact me at  (202) 512-3841 or stephensonj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: GAO’s review focused on the following questions:    To what extent are states currently using their Clean Water State  Revolving Funds (CWSRF) to support conventional wastewater treatment  plant construction versus other qualifying expenses?
What strategies do states use to allocate their CWSRF dollars among  qualifying expenses?
What measures do states use to ensure that their allocation strategies are  resulting in the most efficient and effective use of their CWSRFs?
To determine the extent to which states are currently using their CWSRFs  to support conventional wastewater infrastructure versus other qualifying  expenses, we summarized data from the Environmental Protection  Agency’s (EPA) National Information Management System (NIMS), the  database EPA uses to track expenditures for all 51 CWSRF programs. To  assess the reliability of the NIMS data, we interviewed knowledgeable EPA  officials regarding EPA’s procedures for collecting NIMS data from states  and monitoring the quality of data submitted by states. We also reviewed  EPA-issued guidance for states inputting data to the NIMS database. Based  on these interviews and guidance we determined that the data about the  usage of CWSRF dollars were sufficiently reliable for the purposes of this  report. Moreover, CWSRF programs must comply with the Single Audit  Act and Generally Accepted Accounting Principles (GAAP) and undergo  independent financial audits. However, we determined that data about the  number of CWSRF loan agreements were of less certain reliability to  identify the exact percentage of loan agreements between qualifying  expenses, given that states vary in the way that they account for the  number of loan agreements. For example, states do not use common  standards to report the numbers of projects supported by a loan  agreement, such as the number of projects that are point source versus  nonpoint source in nature. Therefore, in figure 2, we reported data about  the number of loan agreements with appropriate caveats.
To examine the strategies states use to allocate their CWSRF dollars  among qualifying expenses, we interviewed EPA and state-level agency  officials and reviewed annual reports and other official EPA and state- level documents. These interviews included officials at EPA headquarters,  in all 10 EPA regional offices, and select state-level agency officials. We  conducted field visits to Delaware, Minnesota, Montana, North Carolina,  Ohio, Texas, and Washington to obtain detailed information about CWSRF  allocation strategies. We selected the states using a number of factors,  including the following:    geographic diversity, to accommodate variation in water quality issues;    diversity of total amount of CWSRF support;    diversity in CWSRF-supported projects to include states that do and do not  support nonpoint source projects with CWSRF dollars and states that  support varying or unique types of wastewater or nonpoint source  projects; and   a balance of states with and without an Integrated Project Priority Setting  System.
Balancing these criteria, our selected states allowed us to make the  following field visits:    seven states in 6 of the 10 EPA regions;  the second largest program (Texas) and the second smallest (Delaware); five states that supported nonpoint source projects, to varying degrees;  and four states with an Integrated Project Priority Setting System and three  states with a traditional project prioritization system.
These field visits and the documents provided by state-level officials  allowed us to include information on a broad range of criteria states use to  prioritize projects and determine funding. During these field visits, we  conducted interviews with state-level CWSRF program officials and  selected recipients of CWSRF loans. To gather information on additional  states, we conducted semistructured phone interviews with EPA officials  from all 10 regional offices, and we followed up with selected state-level  CWSRF officials to discuss allocation strategies and other aspects of their  programs. We used these interviews to identify the role the EPA regional  offices may have in shaping the state-level CWSRF programs and to gather  information on regional trends and EPA initiatives regarding the CWSRF.  We also reviewed each state’s most recent EPA-conducted annual CWSRF  Program Evaluation Review.
To examine how states ensure that their allocation strategies result in the  most efficient and effective use of their CWSRFs, we interviewed EPA and  state officials about the financial and environmental measures they use to  assess CWSRF performance. The examination of the most recent Program  Evaluation Review also provided information on the financial and program  performance of each state’s CWSRF. In addition, we reviewed EPA’s  electronic CWSRF Environmental Benefits Reporting System by  interviewing the contractor that designed it and other knowledgeable EPA  and state-level officials regarding the process and mechanisms that states  use to input data.
We conducted our work between July 2005 and April 2006 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Selected Clean Water State Revolving Fund Financial Data
paragraphs: The following tables (tables 2-6) and figure (fig. 9) present selected Clean  Water State Revolving Fund (CWSRF) financial data.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above; Steven Elstein, Assistant  Director; Mark Braza; Greg Marchand; Tim Minelli; Justin L. Monroe;  Jonathan G. Nash; Alison O’Neill; and Amber Simco made key  contributions to this report.