v>EPA
          United States      Office of Water
          Environmental Protection  (4606)
          Agency
                        EPA 816-R-97-005
                        February 1997
Drinking Water
State Revolving  Fund
Program Guidelines
              Internet Address (URL) • http://www.epa.gov

    Recycled/Recyclable • Printed with Vegetable Oil Based Inks on Recycled Paper (50% Postconsumer)

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«,  ,  0 D™'nkmg Water

State Revolving Fund Program


        Final Guidelines
           February 1997



      U.S. EnviroranentalProtecBon Agency
     -.„     Office of Water

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 FINAL GUIDELINES
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                                        CONTENTS

INTRODUCTION	  1

I. DEVELOPMENT OF A CAPITALIZATION GRANT APPLICATION/AGREEMENT 	  2

   A.  Items Necessary To Establish a Loan Fund That Complies with Federal
       Requirements	  3
       1.   Assurance that the State has the authority to establish a Fund and to operate the
           DWSRF program in accordance with the SDWA	  4
       2.   Assurance that the State will comply with State statutes and regulations 	  5
       3.   Assurance that the State has the technical capability to operate the program	  5
       4.   Assurance that the State will accept capitalization grant funds in accordance with
           a payment schedule	  5
       5.   Assurance that the State will deposit all capitalization grant funds in the Fund or
           Set-Aside Account	  5
       6.   Assurance that the State will provide an amount at least equal to 20 percent of the
           capitalization grant (State match) in the Fund  	  6
       7.   Assurance that the State will deposit net bond proceeds, interest earnings, and
           repayments into the Fund  	  6
       8.   Assurance that the State will match capitalization grant funds the State uses for
           1452(g)(2) set-asides	  6
       9.   Assurance that the State will use Generally Accepted Accounting Principles	  6
       10.  Assurance that the State will have the Fund and set-aside account audited annually
           in accordance with Generally Accepted Government Auditing Standards	  7
       11.  Assurance that the State will adopt policies and procedures to assure that borrowers
           have a dedicated source of revenue for repayments (or in the case of a privately owned
           system, demonstrate that there is adequate security)  	  7
       12.  Assurance that the State will commit and expend funds as efficiently as possible, and
           in an expeditious and timely manner	  7
       13.  Assurance that funds will be used in accordance with the Intended Use Plan	  8
       14.  Assurance that the State will provide EPA with a Biennial Report	  8
       15.  Assurance that the State will comply with all Federal cross-cutting authorities	  8

   B. Intended Use Plan  	  8
       1.   Priority list of projects, including description and size of community 	  9
       2.   Description of criteria and method used for distribution of funds  .		 11
       3.   Description of the financial status of the DWSRF Program	 11
       4.   Description of the short- and long-term goals of the DWSRF Program	 11
       5.   Description of amounts transferred between the DWSRF and the CWSRF  	 11
       6.   Description of the set-aside activities, and percentage of funds, that will be funded
           from the DWSRF capitalization grant, including DWSRF administrative expenses
           allowance, PWSS program support, technical assistance, etc.  	 12
       7.   Description of how a State disadvantaged community program will define a
           disadvantaged system and the amount of DWSRF funds that will be used for this
           type of loan assistance	 12

   C. Capitalization Grant Agreement		 12

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    D.  Operating Agreement	  13

II.  ALLOTMENT/USE OF FUNDS	  15

    A.  Allotment/Reallotment/Withholding of Funds	  15
       1. Allotment formula	  15
       2. Period of availability and reallotment	  15
       3. Withholding of funds	  15
           a. The Administrator will withhold funds	  15
           b. Reallotment of withheld funds	  16
           c. Loss of primacy	  17

    B.  Set-asides From The National Appropriation And Ceilings on State Allotments 	  17
       1. National set-asides	  17
           a. Indian Tribes/Alaska Native Villages	  17
           b. Health effects studies	  17
           c. Unregulated contaminant monitoring	  17
           d. Small system Technical Assistance  	  18
           e. Operator training reimbursement	  18
       2.  Allotment for D.C. and other jurisdictions	  18
       3.  State set-aside activities	  18
           a. DWSRF administrative expenses  	  19
           b. State program management  	  19
           c. Small systems technical assistance  	-	  20
           d. Local assistance and other State programs 	  20
           e. Movement of funds after capitalization grant award between the Fund and set-aside
               account	  23
           f. Transfer of funds	•	  23

    C. Types of Financial Assistance That the Fund May Provide	  27
       1.  Loans	  27
           a. Repayment of loan	  27
           b. Dedicated repayment source	  27
           c. Financial security of privately-owned systems	  27
           d. Financial, technical, and managerial capability analysis	  28
           e. Disadvantaged communities	  28
           f. Project funding for small systems  	  28
       2.  Buy or refinance existing debt obligations  	  28
       3.  Guarantee or purchase insurance for local debt obligations  	  29
       4.  A source of revenue or security for payment of Fund debt obligations	  29
       5.  Earn interest on Fund accounts  	  30

 III. ELIGIBLE SYSTEMS AND PROJECTS  	  31

    A. Eligible  Systems  	•	  31

    B. Eligible Projects	 31
       1.  Compliance and public health	 31
       2.  Loan assistance to systems that meet the definition in section 1401 (4)(B)  	 32
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        3.  Land acquisition 	  32
        4.  Planning and design of a drinking water project	  32
        5.  Restructuring of systems that are in noncompliance or that lack the technical, managerial
           and financial capability to maintain the system	  32

    C.  Projects not eligible forfunding	  33
        1.  Lack of technical, managerial and financial capability  	  33
        2.  Significant noncompliance	[''   33
        3.  Growth  	     34

    D.  Compliance without DWSRF funding  	  	  34

 IV. STATE/PROJECT LEVEL AUTHORITIES	  35

    A.  Cross-cutting Federal Authorities	;	  35

    B.  Environmental Reviews	    3g
        1.  Equivalency projects	''   35
        2.  Non-equivalency projects	   37
        3.  EPA approval and review process	"  33

V. FUNDING PROCESS	  39

    A.  20 Percent State Match	  39

    B.  State Match forthe 1452(g)(2) Set-aside  	  40

    C.  Federal Funding Process	  40
        1. General	            40
        2. Schedule of payments	  40
        3. Binding commitments	  	  40
        4. Cash draw	'_" ]  4^
           a. Projects	  41
           b. Set-asides	•       43

VI.  REPORTING/REVIEWRESPONSIBILITIES  	  44

   A.  State Responsibilities  	  44
        1. Biennial Report	    44
       2. Annual audit	  45
       3. Information management system	  45

   B. EPA Responsibilities  	 46
       1. Annual review of DWSRF program 	             46
       2. Evaluation	 48
       3. Compliance assurance	 48
       4. Dispute resolution	 49
                                            in

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VII.    APPENDICES	 50



   A.  Federal Cross-cutters	 50



   B.  Criteria for Evaluating a State's Proposed NEPA-Iike Process	 52




   C.  Definitions	 53
                                            IV

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 ACKNOWLEDGEMENTS
 We wish to thank the many individuals who contributed to development of the Drinking Water State
 Revolving Fund Program Guidelines. In particular, we thank those members of the DWSRF Guidance
 Advisory Group for their dedication and commitment in the development of the guidelines under a very
 tight time schedule.  We also wish to thank those members of the public who contributed comments on the
 Interim Guidance.
 State and Regional Representatives
 Region 1
    Jerome J. Healey - EPA *
    David Chin - EPA
    Robert Lenna - Maine *
 Region 2
    Robert Gill - EPA *
    Bruce Kisleca - EPA
    Mike Burke - New York *
 Region 3
    Don Niehus - EPA *
    Paul Marchetti - Pennsylvania *
    Tom Gray - Virginia *
 Region 4
    Sheryl Parsons - EPA *
    Andrew Bartlett - EPA *
    Charles Bradshaw - Mississippi
    David Mitchell - Mississippi *
    Art Sharp - Mississippi
    Tom Webb - Mississippi
    Jeff Debessonet - South Carolina *
 Region 5
    Gene Wojcik- EPA *
    Gary Englund - Minnesota *
    Terry Kuhlman - Minnesota
    Linda Prail - Minnesota
    Greg Smith - Ohio *
 Region 6
    Larry Wright-EPA
    Jay Ray - EPA  *
    George Green - Texas
    Kevin Ward - Texas *
Region 7
    Ken Deason - EPA *
    Jerry Lane - Missouri *
    Steve Townley - Missouri
    Breck Summerford - Missouri
Region 8
    Jack Rycheky - EPA *
    Paul Felz - EPA
    Dan Law - Colorado *
 Region 9
    Jose Caratini - EPA *
    Greg Swartz - Arizona *
 Region 10
    Jerry Opatz - EPA *
    David Monthie - Washington *

 Environmental Protection Agency
 Office of Water-
    James Bourne - DWSRF Project Manager
    Veronica Blette - DWSRF Program
    Connie Bosma - Chief,  Regulatory
         Implementation Branch
    Robert Blanco - Director, Implementation
         Assistance Division
    Sheila Hoover - Clean Water SRF(CWSRF)
         Program
    Kit Farber - CWSRF Program
    Nikos Singelis - CWSRF Program
    Michael Quigley - Director, Municipal Support
         Division
    Richard Kuhlman - Chief, CWSRF Branch

Steve Pressman - Office of General Counsel
Geoff Cooper - Office of General Counsel *
Joe Montgomery - Office of Federal Activities *
Bill Kinser - Grants Assistance Division *
Lisa Carp - Inspector General
Cathy Jenson - Inspector General

Prime Contractor -
Northbridge Environmental Management Consultants
   Mark Kellett
   Terrence Mines
   Deems Buell
*DWSRF Guidance Advisory Group member

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 INTRODUCTION

 The Safe Drinking Water Act (SDWA) Amendments of 1996 (Pub. L 104-182) authorize a Drinking Water
 State Revolving Fund (DWSRF) to assist public water systems to finance the costs of infrastructure
 needed to achieve or maintain compliance with SDWA requirements and to protect public health
 objectives of the Act. Section 1452 authorizes the Administrator of the U.S. Environmental Protection
 Agency (EPA) to award capitalization grants to States, which in turn can provide low cost loans and other
 types of assistance to eligible systems.

 In addition to authorizing the infrastructure fund, the SDWA Amendments also establish a strong new
 emphasis on preventing contamination problems through source water protection and enhanced water
 systems management.  That emphasis transforms the previous law from a largely after-the-fact regulatory
 oriented program into a statute that can provide for the sustainable use of water. Central to this emphasis
 is the development of State prevention programs, including source water protection, capacity development
 and operator certification.  States may use a portion of their capitalization grants to fund these eligible
 activities. The success of these activities will act to safeguard the DWSRF funds that are provided for
 improving system compliance and public health protection and help determine whether the new law's
 potential as a preventive environmental statute is realized.

 The DWSRF program will help ensure that the nation's drinking water supplies remain safe and affordable,
 that drinking water systems that receive funding will be properly operated and maintained, and that
 permanent institutions will exist in each State to provide financial support for drinking water needs for
 many years to come. Congress has placed particular emphasis on assisting smaller drinking water
 systems and those serving less affluent populations by providing greater funding flexibility for these
 systems under the DWSRF, to ensure that these systems have adequate technical, managerial, and
 financial resources to come into or maintain compliance and provide safe water.

 Under the SDWA, a State may administer its DWSRF in combination with other State loan funds, including
 the wastewater SRF, hereafter known as the Clean Water State Revolving Fund (CWSRF).  Beginning
 one year after a DWSRF program receives its first capitalization grant (Fund portion), a State may  transfer
 up to a third of the amount of its subsequent DWSRF capitalization grant(s) to its CWSRF or an equivalent
 amount from its CWSRF capitalization grant to its DWSRF.

 These two provisions linking the DWSRF and the CWSRF signal Congressional intent to implement and
 manage the two programs in a similar manner, EPA also intends to administer the two programs in a
 consistent manner and to apply the principles developed for the existing CWSRF to the DWSRF program
to the fullest extent possible. Like the CWSRF, the DWSRF is fundamentally a State program.  Each
 State will have considerable flexibility to determine the design of its program and to direct funding toward
 its most pressing compliance and public health protection needs.  Only minimal Federal requirements will
 be imposed.

This document provides a comprehensive description of the guidelines that will apply in the operation of
the DWSRF program. In basic terms, the guidelines explain:

    •   what States must do to receive a DWSRF capitalization grant,
    •   what States may do with Federal capitalization grant funds,
    •   what States may do with funds the law intends for activities other than project construction (set-
       asides) and
    •   the roles of both the States  and EPA in managing and administering the program.
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The sources of these guidelines are the Statute itself, existing regulations and policies that apply in EPA
grant programs, particularly those that apply in EPA general grant regulations (40 CFR Part 31) and the
CWSRF program, and the Administrator's authority to issue guidelines and regulations under SDWA.
EPA will incorporate the guidelines by reference in each capitalization grant award as a grant
condition. Where a specific statutory or regulatory provision is the basis for a requirement, that
provision is cited. EPA will follow-up these guidelines with regulations.

The capitalisation grants authorized under section 1452 for the DWSRF program are generally divided
between two purposes: part of each capitalization grant is to be deposited into the DWSRF Fund for
providing loans and other types of assistance for drinking water infrastructure projects; the other part is to
be deposited into a set-aside account(s) for programs, projects and activities that do not receive
assistance from the Fund. Throughout this document, the entire program authorized by section 1452 will
be referred to as the DWSRF program, the loan account as the Fund and the account or accounts for
other programs, projects  and activities as the set-aside account.
I. DEVELOPMENT OF A CAPITALIZATION GRANT APPLICATION/AGREEMENT

The capitalization >grant agreement process begins when the State submits a capitalization grant
application. A capitalization grant cannot be awarded until after Federal funds have been appropriated for
the DWSRF under section 1452 and then allotted by EPA. With its application, the State must also submit
an Intended Use Plan (IUP), documentation on the institutional framework of its DWSRF program, and a
proposed schedule for capitalization grant payments by the EPA.

In addition to the Fund, a State may use part of the capitalization grant to encourage the development of
source water protection and State prevention programs and to enhance water systems management. All
                           DWSRF Program Structure
                                  DWSRF Program
                                 SDWA Section 1452
          DWSRF (the Fund)

            Loans, etc. for
       infrastructure projects
   Set-Aside Account

     State and local
programs, projects and
        activities

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 DWSRF funds will be awarded through the capitalization grant process. Before applying for a
 capitalization grant, a State must prepare an I UP that identifies how it intends to distribute the grant
 among the set-aside accounts) and the Fund and includes the list of projects expected to be funded.

 A State may, however, prepare this IUP in two parts. The first part would present the State's overall
 framework for allocation of the grant among the set-asides and the Fund, but need not include the project
 priority list. The second part would be the IUP for the Fund only.  This two-part process will allow a State
 to proceed with a partial capitalization grant application (e.g., a set-aside) before it completes all of the
 activities required to obtain a full capitalization grant.

 The State must seek meaningful public review and comment on its funding decisions in the IUP. If a State
 applies for the project funds and  set-aside funds separately, the State must seek  public review on each
 separate component of the IUP.

 In addition to identifying the distribution of funds, the capitalization grant application outlines the State's
 planned DWSRF program activities, provides assurances and specific proposals for meeting requirements
 of the SDWA and Federal general grant regulations, and serves as the  basis for negotiations between the
 Regional Administrator (RA) and the State'on the proposed payment schedule. The IUP and the payment
 schedule are then incorporated into the capitalization grant agreement,  which also defines the State
 program and operating methods. Material in these documents that does not change from year-to-year
 may be incorporated by reference in subsequent grant agreements or in an operating agreement (OA),
which remains in effect unless the RA and the State agree to amend it.

 For DWSRF program grant applications, States must submit EPA's standard  application for non-
construction grant assistance (EPA Form SF-424). States should submit grant applications no later than
ninety days prior to the end of the period of funds availability.  By so doing, EPA has adequate time to
properly review the application and, as necessary, request additional information from the State. States
that submit applications after this date run the risk of losing funds due to the provisions governing
reallotment.

EPA Headquarters will concur on one State capitalization grant award in each Region and retains the
flexibility to review additional capitalization grant applications.  Headquarters may  also review applications
of States with more complex funding programs (e.g. leveraging). EPA Headquarters will work with the
Regions to determine which State(s) will be reviewed.
  A.    Items Necessary To Establish a Loan Fund That Complies with Federal
       Requirements

   The State must provide assurances in the capitalization grant application on how it will comply with the
   fifteen specifications discussed below for all DWSRF program funding (some apply only to the Fund).
   In some cases, the State must simply agree or certify in the grant application that it will comply with
   the specifications.  In other cases, documentation on the procedures by which the State plans to
   ensure compliance with the specifications must be furnished. The State must include this
   documentation with its capitalization grant application or the Operating Agreement (OA) (see Table 1).

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1.  Assurance that the State has the authority to establish a Fund and to operate the DWSRF
    program in accordance with the SDWA

    The State must establish a Fund and comply with section 1452 before it can receive a capitalization
    grant award (section 1452(a)(1 )(B)).

    With each capitalization grant application, the State's Attorney General (AG), or someone designated
    by the AG. must sign or concur in a certification that the authority establishing the DWSRF program
    and the powers it confers are consistent with State law and that the State may legally bind itself to the
    terms of the capitalization grant agreement. The AG must also provide written assurance that the
    DWSRF program will be administered by an instrumentality of the State that is authorized to (1) enter
    into capitalization grant agreements with the EPA, (2) accept capitalization grant awards made under
    section 1452(a)(1)(A) of the SDWA and (3) otherwise manage the Fund in accordance with the
    requirements and the objectives of the SDWA. Documentation supporting the AG's certification, such
    as copies of statutes, executive orders, or administrative orders, must be furnished with the
    application or reference must be rriade to documentation submitted with previous DWSRF
    capitalization grant applications. Where waiting for this certification would significantly delay awarding
    the first capitalization grant, the head or chief legal officer of the State agency primarily responsible for
    administering the DWSRF program may sign or concur in the certification at the time of the grant
    award. In this case the capitalization grant agreement will contain the condition requiring the State to
    submit the AG's or designee's concurrence within 120  days of the grant award.  If the AG opinion is
    not received within the 120-day period, EPA will not process further payments until the certification is
    received.

    If more than one State Agency is involved in the DWSRF program, the roles and responsibilities of
    each agency must be described in the application, and a copy of any Memoranda of Understanding or
    interagency agreements) that describes the roles and responsibilities between agencies, must be
    included with the application. However, the agency that is awarded the capitalization grant must
    remain accountable for the use of the funds provided in the grant agreement under EPA's general
    grant regulations (40 CFR 31.3).

    A State may (as a convenience and to avoid unnecessary administrative costs) combine, in
    accordance with State law, the financial administration of the Fund with the financial administration of
    any other revolving fund established by the State if otherwise not prohibited by the law under which
    the Fund was established and if the State certifies that:

        (A) all monies in the Fund, including  capitalization  grants, State match, bond proceeds, loan
        repayments and interest, must be separately accounted for and used solely for the purposes
        specified in section 1452(a); and

        (B) the authority to establish assistance priorities and carry out oversight and related activities
        (other than financial administration) with respect to assistance remains with the State agency
        having primary responsibility for administration of the State's public water supply supervision
        program (primacy agency), after consultation with other appropriate State agencies (section

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   if a State is eligible to receive a capitalization grant but does not have primacy, the Governor shall
   determine which State agency will have the authority to establish priorities for financial assistance
   from the State loan fund (section 1452(g)(1 )(B)).  Evidence of the Governor's determination must be
   furnished with the application.


   2.  Assurance that the State will comply with State statutes and regulations

   The State must agree to comply with all State statutes and regulations that are applicable to DWSRF
   funds, including Federal capitalization grant funds, State match, interest earnings, bond proceeds and
   repayments, and funds  used for set-aside account activities.


   3.  Assurance that the State has the technical capability to operate the program

   The State must provide documentation demonstrating that it has adequate personnel and resources to
   establish and manage the DWSRF program (for example, current and future staffing plan,
   background/qualifications statements, schedule for planned training).
  4.
Assurance that the State will accept capitalization grant funds in accordance with a
payment schedule
  The State must agree to accept Federal grant payments in accordance with the negotiated payment
  schedule and use those payments for the activities of the DWSRF, program under section 1452. As
  part of its capitalization grant application, the State must submit a proposed schedule of grant
  payments that is consistent with its proposed binding commitments outlined in its I UP, and its plan for
  expending set-aside funds. The payment schedule will become part of the capitalization grant
  agreement. The State will receive Federal funds in accordance with the provisions of the EPA-
  Automated Clearing House (formerly known as Letter-of-Credit). (See V.C. below)
  5.
Assurance that the State will deposit all capitalization grant funds in the Fund or Set-Aside
Account
  The State must agree to deposit the capitalization grant in the Fund except for those portions of the
  grant that the State intends to use for set-aside purposes authorized under the SDWA (section
  1452(a)(1)(B)). The State must maintain an identifiable and separate accounts) for the portion, or
  portions, of the capitalization grant to be used for set-aside activities (see ll.B.3. below).

  Once funds are deposited into the Fund, such monies may be used only as authorized  under section
  1452(f).  Under some circumstances, funds may be moved after the award of the capitalization grant
  among authorized activities (see II.B).

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   6.  Assurance that the State will provide an amount at least equal to 20 percent of the
       capitalization grant (State match) in the Fund

   The State must agree to provide an amount into the Fund equaling at least 20 percent of the amount
   of each capitalization grant. Except for Federal payments made from Fiscal Year (FY) 11997
   appropriations, the State match must be deposited into the Fund on or before the date that each
   Federal capitalization grant payment is made to the State (section 1452(e)). States have until
   September 30,1999 to provide the State match for grant payments already received from FY 1997
   appropriations. (See V.A. for additional details.)

   The State may provide its match in a form that is similar to the form of the Federal payment. For
   example the Federal payment is made in the form of an increase to the level of funds available to the
   State through the Automated Clearing House (ACH). The State may establish a similar mechan.sm to
   provide its match.


   7.  Assurance that the State will deposit net bond proceeds, interest earnings, and
       repayments into the Fund

   The State must agree to credit net bond proceeds, interest earnings and repayments into the Fund.
   Fund assets may be used as a source of revenue or security for bonds, as long as the net proceeds
   of the sale of bonds will be deposited into the Fund (section 1452(f)(4)).

   Loans for land acquisition and source water protection, made pursuant to section 1452(k)(1)(A) must
   be repaid A State may deposit these repayments, including principal and interest, in the Fund, or the
   State may choose to deposit the repayments into a separate account dedicated to 1452(k)(1)
   activities. This separate account is subject to the same management oversight requirements as the
    Fund.


    8.   Assurance that the State will match capitalization grant funds the State uses for 1452(g)(2)
        set-asides

    The State may use up to 10% of its capitalization grant for 1452(g)(2) activities.  The State must
    match use of these funds with an equivalent amount of state expenditures or provide documentation
    of in-kind services. A State cannot use any of the 20% match required under Section 1452(e) to also
    match the 10% set-aside.
    9.  Assurance that the State will use Generally Accepted Accounting Principles

    The State must agree to establish fiscal controls and accounting systems, according to Generally
    Accepted Accounting Principles (GAAP) as promulgated by the Governmental Accounting Standards
    Board that are sufficient to account for and report DWSRF Program activities. The accounting
    svstem used for the DWSRF Program must allow for proper measurement of (1) revenues earned by
    the DWSRF Program and other receipts, including, but not limited to, loan repayments, capitalization
    grants  interest earnings, State match deposits and bond proceeds; (2) expenses incurred by the
    DWSRF Program and other disbursements, including but not limited to, loan disbursements,
    repayment of DWSRF bonds, and other expenditures allowed under section 1452; (3) the assets,

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   liabilities and capital contributions in the DWSRF Program; (4) the maintenance of the corpus of the
   Federal and State capital contributions made to the DWSRF Program; and (5) the DWSRF's
   performance in relation to its short- and long-term goals as identified in the previous IUP.


   10. Assurance that the State will have the Fund and set-aside account audited annually in
      accordance with Generally Accepted Government Auditing Standards.

   The State must agree to conduct an annual audit (with separate opinion for project funds) on the Fund
   and set-aside account activities funded in the DWSRF program. The contents of the annual audit are
   discussed in more detail under Part VI of these guidelines.

   The State DWSRF program shall provide an audit on an annual basis.  Such audits shall be
   conducted in  accordance with Generally Accepted Government Auditing Standards (GAGAS) issued
   by the Comptroller General of the United States.

   The Administrator is relying on the annual audit of the DWSRF program to minimize the risk of waste,
   fraud and abuse and increase the chance that such occurrences will be detected and reported. As
   called for under GAGAS, audits should be designed to provide reasonable assurance of detecting
   material misstatements  resulting from noncompliance with applicable laws, regulations, contracts and
   grant agreements and which have a direct and material effect on the determination of financial
   statement amounts and be developed in accordance with State audit practices established in State
   law. If specific information comes to the auditor's attention that provides evidence concerning the
   existence of possible noncompliance, auditors should apply procedures specifically directed to
   ascertaining whether noncompliance has occurred.


   11. Assurance that the State will adopt policies and procedures to assure that borrowers have
      a dedicated source of revenue for repayments (or in the case of a privately owned system,
      demonstrate that there is adequate security)

   The State must adopt policies and procedures to assure that borrowers have a dedicated source of
   revenue for the repayment of loans and must apply these policies and procedures to the portion of the
   loan that must be repaid. States must submit and receive EPA approval for the policies prior'to the
   award of the first project loan. States must develop criteria to evaluate an applicant's financial ability
   to repay the loan, in addition to paying for operation and maintenance costs and other necessary
   expenses.
  12. Assurance that the State will commit and expend funds as efficiently as possible, and in an
      expeditious and timely manner

  The State must agree to commit and expend all funds allotted under Section 1452 "as efficiently as
  possible" (section 1452(g)(3)), and in a timely and expeditious manner.  The State must enter into
  binding commitments with recipients of Fund assistance equal to the total amount of each grant
  payment and required State match deposited in the Fund within one year of the grant payment. States
  need to work with loan recipients to make sure that projects are funded and completed in a timely and
  expeditious manner. (See V.C.3. for additional details.)

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   13. Assurance that funds will be used in accordance with the Intended Use Plan

   The State must agree to expend DWSRF funds in accordance with an Intended Use Plan (section
   1452(b)) that has undergone public review and comment. (See I.B. for additional details)


   14. Assurance that the State will provide EPA with a Biennial Report

   The State must agree to complete and submit a Biennial Report on the uses of the DWSRF program.
   The scope of the report covers both the Fund and set-aside account activities. The contents of the
   Biennial Report are discussed in more detail under Part VI of these guidelines.

   States which jointly administer DWSRF and CWSRF programs, in accordance with section
   1452(g)(1), may submit a report which covers both programs. If the State elects to prepare a joint
   report, it may either (1) submit a joint report in alternate years and an annual CWSRF report in the
   other years or (2) submit a joint report annually.

   Even though the report covers both programs, financial information must be reported separately for
   each program. For example, the DWSRF and CWSRF should be reported in separate columns in
   audited  balance sheets, income statements, and other financial statements.


   15. Assurance that the State will comply with all Federal cross-cutting authorities

   The State must agree to ensure that all applicable Federal cross-cutting authorities will be complied
   with. (See IV.A for additional details.)


B. Intended Use Plan

   The central component of the capitalization grant application is an IUP (section 1452(b)), which
   describes how the State intends to use available DWSRF program funds for the year to meet the
   objectives of the SDWA and further the goal of protecting public health.

   The State must prepare the IUP, and  provide it to the public for review and comment prior to
   submitting it to the  RA as part of its capitalization grant application.  EPA expects that the public
   review and comment process that a State uses to discuss the IUP will be open and that it will provide
   the public with adequate opportunity to comment on how the State plans to use capitalization grant
   funds. States should also respond to substantial comments received. The State must include in the
   capitalization grant application a description of the public review process and how it responded to
   major comments and concerns.

   For efficient planning and to maintain consistency in calculating set-asides, scheduling payments and
   other matters, each IUP must conform to the fiscal year adopted by the State for the DWSRF program
   (e.g., the State's fiscal year or the Federal fiscal year).

   In the IUP, the State must describe how it will use all funds available to the capitalization grant,
   including funds that will be allocated to the set-asides. Specifically, the IUP must describe how all
   available funds, including capitalization grants, State match, loan repayments, interest earnings, bond
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   proceeds, and other monies deposited into the DWSRF program, are intended to be expended. States
   may, as an alternative, develop the IUP in a two part process, one part that identifies the distribution
   and uses of the funds among the various set-asides and the Fund and the other part dealing only with
   project funding in the Fund.  The two-part process would allow a State to submit a capitalization grant
   application for a portion of the DWSRF program funds before they complete all of the specific funding
   decisions. In this situation, a State would have to conduct two rounds of public review and comment -
   one for the overall distribution of funds and specific details on particular set-aside uses and the other
   for the priority project list(s).

   For example, assume that a  State has decided to allocate 76% of its funds to the DWSRF Fund, 10%
   of its funds to the source water delineation set-aside, 4% for DWSRF administration, and 10% for the
   Public Water System Supervision (PWSS) program set-aside, but the State has not yet developed its
   project priority list(s). This State could seek public review and comment on the allocation of funds and
   submit a capitalization grant application for the 24% of funds that will be used for set-aside purposes
   As with all grant applications, the State would have to include a detailed description of what the set-
   aside funds would be used for. The State would then, at a later date, develop the Fund component,
   including the project priority list, seek public review and comment on this list, and then submit an
   amendment to the capitalization grant application for the additional funds.

   Because the Fund can only provide those types of assistance described in section 1452(f), funds that
   the State will use for set-aside activities must be placed in an account that is separate (outside) from
   the Fund account.

   The State must prepare an  IUP as long as the Fund account and/or set-aside account funds
   remain in operation, not just in those years in which the State submits an application for a
   Federal capitalization grant.

   States must provide information regarding the IUP in a format and a manner that are consistent with
  the needs of the RA.
  1. Priority list of projects, including description and size of community

  In accordance with Section 1452(b), States must develop a list of projects that will receive funding in
  the first year after the grant award and a comprehensive priority list of eligible projects for funding in
  future years.  In determining the priority of funding, a States' "intended use plan shall provide, to the
  maximum extent practicable, that priority for the use of funds be given to projects that:

         address the most serious risk to human health;
         are necessary to ensure compliance with the requirements of this Title [SDWA] (including
         requirements of filtration); and
         assist systems most in need, on a per household basis, according to State "affordability
         criteria" (section 1452(b)(3)).
iii.
  Section 1452(a)(2) of the Act identifies eligible projects as those projects "which the Administrator has
  determined, through guidelines, will facilitate compliance with national primary drinking water
  regulations... or otherwise significantly further the health protection objectives of this title."

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   Taken together, these two sections clearly signal Congressional intent that States must give maximum
   priority to projects needed for SDWA compliance, projects that provide the greatest protection to
   public health, and those projects which assist systems most in need on a per household basis.  States
   must develop a priority list that reflects this intent and fund projects in this order, to the maximum
   extent practicable. The priority system must provide sufficient detail to permit the public and EPA to
   readily understand how the system has been established and the basis for ranking individual systems.
   A State that does not adhere to the above stated criteria must detail why they were unable to do so.

   This is clearly different from the provisions in the CWSRF under which States can fund any project on
   the priority list regardless of its position on the list. To comply with this Congressional directive, EPA
   will annually review a States actions to see how closely the State adheres to the priority list.

   Although "readiness to proceed" is not an appropriate factor in ranking projects based on their
   compliance and public health needs, EPA does recognize that States will need to consider this when
   deciding which  projects to fund. This will be especially critical in the first two years, because many
   highly-ranked projects may not be ready to apply for assistance.  Consequently, EPA will approve
   priority systems that take readiness to proceed into account only for the first two fiscal years.

   The IUP list of projects to receive funding (project priority list) must include the name of the public
   water system, the priority assigned to the project, and a description of the project (including the type of
   project), the expected terms of financial assistance based on the best information available at the
   time the IUP is  developed, and the population of the system's service area at the time of the loan
   application.

   The comprehensive IUP priority list must include the  priority assigned to each project and, to the
   extent known, the expected funding schedule for each project (section 1452(b)(3)(B)). A State may
   combine these two lists into one list by identifying which projects on the single list will receive funding
   in that year.

   The State must seek public review and comment on  its IUP. The IUP project list may  be amended
   during the year under provisions established in the IUP as long as the project has been previously
   identified through the public participation process. The IUP may also allow for the addition of projects
   on an emergency basis.  Such projects would include those where some type of failure was
    unanticipated and requires immediate attention to protect public health.

   A State may bypass a project on the priority project list if the State's bypass procedures have
    undergone public review and comment. These bypass procedures should clearly identify the
    conditions which would allow a project to be bypassed and the way the State will identify which
    projects would receive the bypassed funds.  If a State elects to bypass a project for reasons other
    than fiscal capacity or readiness to proceed, the State must provide a justification for this bypass and,
    in each specific instance, describe why it was not practicable to fund projects that were ranked higher
    on the priority list than the funded project.  In all such cases, the State must describe its efforts to
    adhere to the priority list, as required by the Act, "to the maximum extent practicable". States must
    work with bypassed projects to ensure that the project will be eligible for funding in the following fiscal
    year, to the maximum extent possible.

    A State must annually use at least 15% of all funds credited to the Fund account to provide loan
    assistance to systems serving fewer than 10,000 persons (section 1452(a)(2)), to the extent that there
    are a sufficient number of eligible projects to fund. States must determine the amount to be used for
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   this provision based on the level of available funds that the State expects to have for funding DWSRF
   projects during the period covered by the IUP.  A State that does not use at least 15% of the available
   funds for small systems must describe in the next IUP the steps it is taking to ensure that a sufficient
   number of projects are identified to meet this requirement in future years. States that exceed the
   prescribed percentage of assistance to these systems in one year may bank the excess toward future
   years.


   2.  Description of criteria and method used for distribution of funds

   The I UP must describe the criteria and method that the State will use to distribute all funds. This
   description shall include: (1) the process and rationale for distribution of funds between the Fund and
   the set-aside account, (2) the process for selection of systems to receive assistance, (3) the priority
   and allocation of assistance the State gives to different eligible categories of projects, (4) the rationale
   for providing different types of assistance and terms (e.g., length of repayment, interest rate),
   including a description of the financial planning process undertaken by the Fund, and (5) the'impact of
   all funding decisions (e.g., set-aside-  disadvantaged communities) on the long term financial health of
   the Fund.
   3. Description of the financial status of the DWSRF Program

   The IUP must include a description of the financial status of the DWSRF Program. This description
   should detail: the total dollar amount in the Fund; the total dollar amount used as set-asides, including
   the level of funds banked; the types of projects to be funded; and the amount of the capitalization
   grants that will be used for disadvantaged community assistance. The IUP should include factors
   such as expected estimated loan demand, whether the State will leverage, and other factors that
   determine the short-term and long-term focus and health of the program.


   4.  Description of the short- and long-term goals of the DWSRF Program

   The IUP must describe the short term goals of the DWSRF program, including how the capitalization
   grant funds will be utilized to ensure compliance and protect public health goals of the Act. "

   The IUP must also describe the objectives of the DWSRF program over the long-term, and how these
   objectives can be realized. These objectives include public health, compliance with the Act, assisting
   systems to ensure affordable water and maintaining  the long-term viability of the Fund.  The IUP
   should include a description of how the DWSRF program funds will be used to support other
   components of the State drinking water and ground water programs, including water system
   restructuring, capacity building, operator certification, source water protection, and wellhead
   protection.
  5.  Description of amounts transferred between the DWSRF and the CWSRF

  The Governor of a State may transfer up to 33% of the DWSRF capitalization grant to the CWSRF or
  an equivalent amount from the CWSRF to the Fund, starting a year after the State has received its
  first DWSRF capitalization grant (project funds), but no later than the beginning of FY 2002 (section


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   302 of Pub. L. 104-182).  EPA will provide additional guidelines concerning these fund transfers at a
   later date.


   6.  Description of the set-aside activities, and percentage of funds, that will be funded from
       the DWSRF capitalization grant, including DWSRF administrative expenses allowance,
       PWSS program support, technical assistance, etc.

   The IUP must identify what portion of the capitalization grant a State is electing to use for set-aside
   activities  (e.g., section 1452(g)(2), section 1452(k)), and place those funds in a set-aside account.
   The set-aside account must be dedicated to supporting the other activities authorized in section 1452.
   The IUP must describe how the funds in the separate account(s) will be used and provide a schedule
   for their expected use. A State must describe how it intends to use the funds and the expected
   accomplishments that will result from use of the funds for a given purpose. For project set-aside
   funds, the State must describe, at a minimum, the process by which projects will be selected and how
   the funds will be distributed.

   Recipients of 1452(k) land acquisition or source water protection loans are required to repay the loans
   in the same manner as loans from the Fund. The State may place the repayments in the Fund or it
   may set up a separate account to continue  funding eligible 1452(k) loan activities.  Subsequent loans
   from this separate account must meet the same requirements as loans from the Fund.


   7.  Description of how a State disadvantaged community program will define a disadvantaged
       system and the amount of DWSRF funds that will be used for this type of loan assistance

   A State may provide additional loan  subsidies, including forgiveness of principal, to disadvantaged
   communities receiving Fund loans (section 1452(d)). If the State establishes a disadvantaged
   community program it must describe in the IUP how the program will operate.  Using the best
   information available at the time of the IUP, this description must include: (1) a definition of
   disadvantaged community, (2) the total amount of the capitalization grant that may be used for
   providing additional subsidies, (3) to the  maximum extent practicable, an identification of systems that
   will receive additional subsidies and the amount and (4) a description of affordability criteria that the
   State will use to determine the level of principal forgiveness.

   The value of loan subsidies a Fund  provides during the fiscal year adopted by the IUP under this
   provision cannot exceed 30 percent of the  amount of the capitalization grant for that year (1452(d)(2)).
   Loan subsidies under this provision cannot be banked for future use.
C.  Capitalization Grant Agreement

    The Capitalization Grant Agreement (CGA) is the principal instrument by which the State commits to
    manage its DWSRF program, and to ensure that it conforms with the requirements of the SDWA
    Amendments of 1996.  The CGA contains, or incorporates by reference, the following parts of the
    agreement: the application; the  IUP; the agreed upon payment schedule; certifications or other
    agreement requirements discussed in the first section; the operating agreement, if used, and other
    documentation required by the RA. In addition to these requirements, the CGA must also define the
    types of performance measures, reporting requirements, and oversight responsibilities that will be

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   required to determine compliance with section 1452.  Agreement is also needed on the contents of the
   Biennial Report, annual audit, and the EPA review. Table 1 describes how each of the following
   assurances and CGA requirements must be addressed.

   The capitalization grant agreement must also describe the process a State will use to ensure that
   systems have the technical, financial, and management capacity to operate the system before
   receiving a loan. If a system in non-compliance is going to receive a loan, the State must describe
   how the system has changed or will change its operation over the long-term.

   A State may also place into a separate, non-project administration account, loan application fees or
   other program fees or assessments that a DWSRF program collects from loan recipients to help offset
   the cost of running the DWSRF program.  Because these fees and assessments would be considered
   program income under the Agency's general grant regulations (40 CFR 31.25), the grant agreement
   must specify that they will be used for purposes directly related to the DWSRF program, that they will
   not be made available for other purposes and that they will be properly accounted for in the annual
   audit.  The IUP  must identify the amount of any fees that are placed in the non-project administration
   account and describe how they are used.


   D. Operating Agreement

   The framework  and procedures of the DWSRF program that are not expected to change annually may
   be described in  an Operating Agreement (OA) that can be included as part of the Capitalization Grant
   Agreement.  The grant application and subsequent grant agreement may incorporate by reference
   relevant portions of the previous year's application.  If there are proposed changes to the OA, the
   State will need to negotiate changes with the Region that may be necessary prior to submitting the
   next capitalization grant application.

   The decision to  prepare an OA does not entail additional program requirements, demonstrations or
   documentation.  The OA simply describes the structure of the State's program, explains its goals and
   objectives, and includes review, overview, accounting, auditing and sanction provisions. Upon the
   successful completion of negotiations, the OA must be signed by the State signatory to the CGA and
   the Regional Administrator. On an annual basis, the OA must be supplemented with an Intended Use
   Plan that identifies the projects and activities that the State plans to support with financial assistance
   from the fund. Based on the OA and the Intended Use Plan, the Region will award a capitalization
   grant to the State.  Regions and States that choose this alternative method of program implementation
   may find that it facilitates their program management capability.
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                                                  TABLE 1

                            State Requirements for the Capitalization Grant Agreement
    REQUIREMENT
    C6 APPLICATION
    Part 31 Assurances (Grant Conditions)
    Established SRF & Instrumentality
    Comply with State Statutes/Regulations
    Technical Capability To
     Manage Program
    Review Technical, Financial &
     Managerial Capability of
     Assistance Recipients
    Intended Use Plan (IUP)
        (1) List of Projects
        (2) By-pass Procedures
        (3) DWSRF Goals
        (4) Activities To Be Supported
        (5) Disadvantaged Communities
        (6) Assurances and Proposals
            - Environmental Review
            - Federal Cross-Cutters
            -120% Binding Commitments
            - Timely Expenditure
        (7) Criteria & Method for
           Distributing Funds
    Payment Schedule/Schedule of
      Estimated DWSRF Disbursements
    Other Activities To Be Supported
      by Set-Asides
    Transfer of Funds To/From CWSRF

    GRANT AGREEMENT
    Accept Grant payments
    Deposit Funds in DWSRF Fund
    Deposit State Match
        - Source of the Match
        - Deposit of Match
    120% Binding Commitments
    Information Management System
    Use State Laws & Procedures
    Use GAAP (Generally Accepted Accounting
      Principles)
    Use GAGAS (Generally Accepted
      Government Auditing Standards
    Recipient Accounting
    Biennial Report
    Annual Audit
    Environmental Review**
    Program Oversight
    HOW ADDRESSED

Agree to
Document (AG certification)
Agree to
Document

Agree to
Propose
Describe, if applicable
Describe
Describe
Describe, if applicable

Document/certify
Agree to
Agree to
Agree to
Describe

Agree to and Propose

Intended Use Plan

Describe
 Certify
 Certify

 Identify
 Certify *
 Agree to
 Agree to
 Agree to
 Agree to

 Agree to

 Agree to
 Agree to
 Agree to
 Agree to
 Agree to
         All changes to the agreement or OA require a formal grant amendment.

         * For payments from FY 1997 appropriations, the State must agree to provide the certification no later than September
         30 1999  of the availability of its match and provide the State match for grant payments already received from the FY
         1997 appropriations. A State that fails to certify by that date may not receive further grant payments until the match is
         deposited.
         ** States required to certify environmental review process.
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II.  ALLOTMENT/USE OF FUNDS

    Section 1452(m) authorizes a total of $9.6 billion for the DWSRF program from FY 1994 through FY
    2003.  This section describes allotment, reallotment, and withholding of these funds; national and
    State set-asides; and types of financial assistance available from the Fund.

    A.  AIlotment/Reallotment/Withholding of Funds


    1. Allotment formula

    Funds available to States from FY 1997 appropriations will be allotted according to the formula used
    for distributing Public Water System Supervision (PWSS) grants under section 1443 in FY 1995.
    Funds available to States from FY 1998 appropriations and beyond will be allotted according to a
    formula that reflects the needs identified in the most recent Needs  Survey conducted pursuant to
    section 1452(h).  In each case, the minimum proportional share established in the formula that each
    State will receive will be one percent of the funds available for allotment to all the States. The District
    of Columbia will also receive a one-percent share of available funds (section 1452(a)(1)(D)). The
    Virgin Islands and the Pacific Island territories will together receive an allotment of 0 33 percent
    (section 1452(j)).


    2. Period of availability and reallotment

    Funds are available to the States during the fiscal year in which they are authorized and during the
   following fiscal year (section 1452(a)(1)(C)). The amount of any allotment not obligated to the State at
   the end of this period of availability will be reallotted among other States according to the original
   formula used to allot these funds (FY 1997 funds: PWSS formula; FY 1998 funds and beyond:
   appropriate Needs Survey). Any State that has not obligated all of the funds allotted to it in the period
   of availability shall not be eligible to participate in the reallotment of funds for that particular fiscal year.
   The Administrator may reserve up to 10 percent of the funds available for reallotment to provide
   additional assistance to Indian tribes (section 1452(a)(1)(E)).


   3. Withholding of funds

   a. The Administrator will withhold funds under the following provisions:

       i.   Capacity Development Authority -The Administrator will withhold 20% of a State's allotment
          unless the State has obtained the legal authority or other means to ensure that all new
          community water systems and new nontransient, noncommunity water systems commencing
          operation after October 1, 1999, demonstrate technical, managerial, and financial capacity
          with  respect to each drinking water regulation in effect. This withholding provision becomes
          effective in FY 1999, which begins October 1,1998. For any capitalization grant applications
          awarded after October 1,1998, but before October 1,1999 (FY 1999 funds), EPA will not
          obligate 20 percent of capitalization grant funds allotted to a State that does not have
          adequate authority in  place.  If a State documents by September 30, 1999, that the authority
          is in  place to ensure that new systems demonstrate adequate capacity, then EPA will award
          the unobligated FY 1999 funds.  If a State does not have the authority in place  by September
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ii.
           30, 1 999, it will lose the 20 percent of FY 1 999 funds that were not awarded originally. EPA
           will withhold 20% of each successive capitalization grant allotted to a State and the withheld
           funds will be reallotted. The withholding provision will cease to apply to federal funds
           appropriated starting the next fiscal year after a State obtains the required authority.

           Capacity Development Strategy - The Administrator will withhold funds from any States that
           are not developing and implementing a strategy to assist public water systems in acquiring
           and maintaining technical, managerial, and financial capacity. The amount of a State's
           allotment under section 1452 that will be withheld on October 1 of each fiscal year is 10
           percent of FY 2001 allotments, 15 percent of FY 2002 allotments, and 20 percent of each
           subsequent year's allotments. The determination of when the State meets the requirement
           will occur on October 1 of each year. States not meeting the requirement for that fiscal year's
           federal appropriation will lose funds to reallotment regardless of when the State submits the
           capitalization grant application.  Funds will no longer be withheld  once a State develops and
           implements its capacity development strategy.  The withholding provision will cease to apply
           to federal funds appropriated starting the next fiscal year after a State obtains the required
           authority. EPA plans to issue separate guidelines for States to use in developing these
           strategies.

           The total amount of funding that will be withheld if a State fails to meet the requirements of
           both of the capacity development provisions is 20 percent of the capitalization grant (section
iii.
           Operator Certification Program - The Administrator will withhold 20% of a State's funds
           unless the State has adopted and is implementing a program for certifying operators of
           community and nontransient, noncommunity public water systems. This withholding provision
           will begin two years after the Administrator publishes guidelines for certification of operators.
           The Administrator is required to publish guidelines no later than February 6, 1 999. The
           withholding provision will cease to apply to federal funds appropriated the next fiscal year after
           a State complies with the requirement (section 1452(a)(1)(G)(ii)).
    b. Reallotment of withheld funds

    All funds withheld from a State because the State does not have the capacity development authority,
    does not develop and implement a capacity development strategy, and/or does not develop and
    implement an operator certification program, will be reallotted, using the same formula that was
    originally used to allot those funds.  A State that has funds withheld for any one of these three
    activities is not eligible to receive reallotted funds for that activity. Thus, if a State does not develop an
    operator certification program but does have a capacity development strategy, the State would be
    eligible to receive a reallotment from withheld funds from States without capacity development
    programs but would not be eligible for reallotted funds under the operator certification provision. A
    State would also have to be eligible to receive reallotted funds in accordance with the reallotment
    provisions in section 1452(a)(1)(E) prior to being eligible to receive reallotted funds under the specified
    withholding provisions. This section limits reallotment to those States that have obligated all of their
    allotment during the period of availability.
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   c. Loss of primacy

   A State may not receive capitalization grant funds if the State had primary enforcement authority
   (primacy) for drinking water pursuant to section 1443 (section 1452(a)(1)(F)) on the date of enactment
   of the Safe Drinking Water Amendments of 1996 (August 6,1996) and the State subsequently loses
   primacy.  A State would not be eligible for future capitalization grants until primacy is restored
   Wyoming and the District of Columbia did not have primacy prior to August 6,1996.  However the law
   provides that they are eligible to receive DWSRF funds.  The Administrator may reserve funds'from
   the allotment of a State that loses primacy for use by EPA to administer primary enforcement
   responsibilities in that State. The balance of the funds not used by EPA to administer primacy will be
   reallotted to other States pursuant to section 1452(a)(1 )(E).


   B. Set-asides From The National Appropriation And Ceilings on State Allotments

   Section 1452 authorizes numerous national set-sides from the appropriation for that section and
   allows States to use certain percentages of their allotment for various purposes other than project
   construction.  Table 2 provides an overview of the available set-asides. Table 3 presents a flow chart
   for calculating these set-asides and Table 4 gives a numerical example of the set-asides. States need
   to determine  the level of funds necessary to evaluate short-term program needs to protect public
   health and prevent contamination versus the long-term need to maintain an adequate level of
   infrastructure to address system needs over the long-term.


   1. National set-asides

  The National  set-asides are reserved from the funds annually appropriated by Congress to carry out
  section 1452.  These set-asides are:

  a. Indian Tribes/Alaska Native Villages

  The Administrator may reserve (the Administrator will provide these funds) 1.5% from annually
  appropriated funds for grants to Indian Tribes and Alaska Native Villages (section 1452(i)). EPA will
  provide separate guidelines regarding the selection of projects, project management,  and  program
  oversight for these grants.  Indian Tribes and Alaska Native Villages that have not otherwise received
  either grants or DWSRF assistance under 1452 for a specific project are eligible to receive grants
  under this provision.

  b. Health effects studies

  Section 1452  requires the Administrator to reserve $10 million from annually appropriated  funds to
  conduct health effects studies on drinking water contaminants (section  1452(n)).

  c. Unregulated contaminant monitoring

  Starting in FY 1998, section 1452 requires the Administrator to reserve $2 million from annually
  appropriated funds (section 1452(o)) to pay for the costs of monitoring unregulated contaminants
  under section  1445(a)(2)(C).
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   d. Small system technical assistance

   The Administrator may reserve up to 2% of the funds annually appropriated in FYs 1997-2003 to carry
   out the technical assistance provisions of section 1442(e) to the extent that the total amount of funding
   appropriated under section 1442 is not sufficient. The set-aside from section 1452(q) plus the
   appropriation in 1442(e) cannot exceed $15 million per year (section 1452(q)).

   e. Operator training reimbursement

   The Administrator will reimburse States for the costs of training and certifying operators of drinking
   water systems serving 3,300 persons or fewer to meet the requirements of guidelines that the
   Administrator must publish by  February 6,1999 (section 1419(a) and (d)). The Congress has
   authorized to be appropriated  $30 million annually from FY 1997 through FY 2003 for these
   reimbursement costs (section  1419(d)(3)).  If the appropriation is not sufficient to meet these
   requirements, the Administrator, prior to allocating funds to the States, shall reserve such sums from
   1452(m) as are necessary to provide grants to States. Funds under this provision are set-aside prior
   to the allotment of funds to the States, and will be provided as a separate grant.


   2. Allotment for D.C. and other jurisdictions

   The Administrator shall reserve one percent of the funds allotted to the States for the District of
   Columbia. The administrator shall also reserve up to 0.33% of the total funds allotted to the States for
   grants to the Virgin Islands, the Commonwealth of the Northern Mariana Islands, American Samoa,
   and Guam (section 1452G)). The funds will be allotted according to the formula for allotting PWSS
   grants under section 1443(a)(4), and may be used to fund projects eligible for assistance under
   section 1452(a)(2).  EPA will provide separate guidelines regarding the management of these set-
   asides.
    3.  State set-aside activities

    Section 1452 authorizes States to provide funding for certain set-aside activities, described below,
    provided that the amount of that funding does not exceed ceilings specified in the Statute. A State
    must describe in the IUP the amount of funds that it will use for these activities. A set-aside account
    must be set up to accept these funds.  Before cash can be drawn down from the federal ACH, a State
    must provide a workplan to EPA describing how the funds will be expended.

    When set-asides are used to fund program (non-project) activities, the State and EPA must negotiate
    a workplan indicating how funds will be spent.  No cash draws will be authorized from the federal ACH
    until the workplan(s) have been approved by EPA. While EPA reserves the right to require additional
    information from the States, the workplan should at a minimum include:
           the funding amount in dollars and as a percentage of the State DWSRF allocation;
           the number of FTEs projected for implementing each set-aside;
           the goals and objectives, outputs, and deliverables for each set-aside;
           a schedule for completing activities under each set-aside;
           the responsibilities of the agencies involved in implementing each set-aside;
           a description of the evaluation process to assess the success of work funded under each set-
           aside.
                                               18

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FINAL GUIDELINES
                                                                           February 28, 1997
   If a State does not expend all of its set-aside funds, a State may redirect the monies to the Fund, or it
   may redirect the funds to another set-aside activity as long as the maximum allowed for that activity
   has not been reached for the Fiscal Year from which the funds were derived.  Set-aside funds may not
   be used to subsidize water system operation and maintenance expenses or for project activities
   eligible for funding from the Fund or those projects specifically not eligible for assistance from the
   Fund.


   a.  DWSRF administrative expenses

   A State may use up to four percent of the funds allotted to it for the reasonable costs of administering
   the programs under section 1452 and providing technical assistance (section 1452(g)(2)). These
   costs may include such activities as issuing debt; DWSRF program start-up costs; audit costs;
   financial, management and legal consulting fees; development of IUP and priority ranking system;
   development of affordability criteria; and cost of support services provided by other State agencies.

   Expenses incurred issuing bonds guaranteed by the Fund may be absorbed by the proceeds of the
   bonds and need not be charged against the four percent administrative costs allowance, if done so
   prior to depositing the proceeds into the Fund. The  net proceeds of those issues must be deposited in
   the Fund.

   Funds that a State chooses to use for administrative purposes cannot be deposited into the  Fund.
   Instead, these funds must be deposited into a separate account,  or with other non-project funds.

   The State may charge an application fee to process, manage or review an application for Fund
   assistance. Such fees may be collected in an account outside the Fund and used to supplement
   administrative expenses. Monies in this non-project fee account must be dedicated to the
   administrative purposes associated with the DWSRF program.  If fees are collected and deposited
   into the Fund account, they are subject to the stipulated uses of the Fund, which  does not include the
   use of funds for administrative purposes.

   States may recover reasonable costs associated with the development of the DWSRF program, if the
  costs were incurred between August 6, 1996, the date of enactment of the SDWA Amendments' of
   1996,  and the date on which the first capitalization grant for a State was awarded. Documented
  reimbursement costs will be counted as part of the amount, up to four percent, that a State can set
  aside for administrative purposes.

  If the State does not obligate the entire four percent for administrative costs in one year, it can bank
  the excess balance and use it for administrative costs in later years.

  b.   State program management

  A State may use up to a total of 10 percent of its allotment to:

     •   administer the State PWSS program;
     •   administer or provide  technical assistance through source water protection programs, which
         includes the Class V portion of the Underground Injection Control Program;
                                            19

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MNAL GUIDELINES
February 28, 1997
       .   develop and implement a capacity development strategy; and
       .   develop and implement an operator certification program (section 1452(g)(2)).

   The State must provide a dollar for dollar match (100 percent for up to 10 percent of the capitalization
   grant) for capitalization grant funds used for these purposes. This match is separate, and in addition
   to the 20 percent match for the capitalization grant. At least one-half of the State match funds
   provided by the State must be in addition to the amount the State expended for the PWSS program in
   FY1993 (see example on following page). Federal grant regulations preclude a State from using the
   same State funds to meet match requirements for two different programs.  Thus, the same State dollar
   cannot be used to meet this match requirement and the match requirement in Section 1443 of the
   SDWA (PWSS program grants), except that the FY 1993 match for the PWSS can offset up to one-
   half of the match required under section 1452 (g).

   Funds used to administer or provide technical assistance for source water protection programs shall
   not be used for enforcement actions. States may credit toward the one-to-one match State dollars
   used for the PWSS program that are in excess of the current fiscal year State match required in
   Section 1443. States may also credit current year expenditures on capacity development and
   operator certification programs toward the State's required match.

   If the State does not obligate the entire 10 percent for these activities in any one year, it can bank the
   excess balance and use it for the same activities in later years.

   c.  Small systems technical assistance

   A State may use up to two percent of its allotment to provide technical assistance to public water
   systems serving 10,000 people or fewer (section 1452(g)(2)). If the State does not use the entire 2
   percent for these activities against a given allotment, it can bank the excess balance and use it for the
   same activities in later years,  if a State chooses to use funds under this set-aside, EPA encourages
   States to use available funds to support small system efforts to apply for DWSRF loans.  A State may
   use these funds to support a technical assistance team or to contract with outside organizations to
    provide technical assistance.

    d. Local assistance and other State programs

    A State may fund several other categories of activities to assist  development and/or implementation of
    local drinking water protection initiatives (section 1452(k)).  A State may use up to 15% of the
    capitalization grant amount for specified uses below, with the stipulation that not more than 10% of the
    capitalization grant amount can be used for any one activity.  A  State is not allowed to bank any of
    these funds for use in future years, with the exception of the funds used for source water delineation
    and assessment. •

    Funds loaned out under this section (i and  ii) must be repaid in 20 years after completion of a project.
    States may place repayments in the project fund or set up a new, separate dedicated account(s) for
    1452(k)(1) activities.  Assistance from this separate account(s)  may continue to be used for any
    eligible 1452(k)(1) activity.
                                               20

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 FINAL GUIDELINES
                                                                                  February 28, 1997
                              State Program Management Match Example

 Assume a State will receive a $10 million capitalization grant, and it would like to use 10% of the funds for this
 set-aside, which is $1 million. The State must match it with $1 million in State funds. According to the Statute, a
 State may receive credit for certain expenditures in FY 1993 and the current year being discussed, in lieu of
 having to match entirely with new appropriations.  One important reminder is that at least one-half of the funds
 must be in addition to the amount expended by the State for the PWSS program in FY 1993.
  PWSS grant

  State match for PWSS match

  Additional State funds
 FY 1993

$900,000

$300,000

$200,000
 FY1997

$1,200,000

 $400,000

 $300,000
 Determination of State Credit
 In lieu of providing funds for part or all of this match provision, many States may be able to credit current funds
 that a State is using for its PWSS program or other eligible funding.  The Statute allows a State to use funds
 expended for the PWSS program that are above and beyond the required PWSS State match, for both the
 current year ($300,00 for FY 1997 in this example) and in FY 1993 ($200,000 here).  In addition, a State may
 credit the funds that the State is using for the State PWSS match portion in FY 1993 only ($300,000). Thus, in
 this example, you first look at the $300,000 from FY 1997, since the Statute requires that at least 50% of the
 total match come from the current year (FY 1997 in this example). The State could then potentially use up to
 $500,000 ($200,000 + $300,000) from FY 1993. However, in this example, the State would be limited to the use
 of $300,000 credit in FY 1993, due to the limitation of having only $300,000 of credit available in FY 1997.
 Thus, the State could use a total of $600,000 without providing new appropriations or other in-kind services. If
 the State wants to use the remaining $400,000 ($1 million less $600,000 already matched) in eligible set-aside
 funds, the State would need to provide an additional $200,000 or an equivalent amount of in-kind services. This
 additional $200,000 in FY 1997 would allow the State to use the additional $200,000 of unused credit from FY
 1993. Thus, the State could take advantage of the full 10% set-aside with only a small amount of new funding
 or other in-kind contributions. In-kind services could include funds that the State currently expends on operator
 certification or capacity  development programs.  The State could also choose to simply use only $600,000 if no
 additional funding could be secured.

 Second Example
 Using the above example, if the State provided no funding for the PWSS  program above the  $400,000 State
 match in FY 1997, the allowable credit for FY 1997 would  be zero. Thus,  the State could not receive credit for
 FY 1993 allowable credits without providing State contributions in addition to the PWSS State match in FY 1997.
This is due to the requirement that at least one-half of the funds be in addition to funding since 1993. For each
new dollar the State provides, up to $500,000, the State could match it with eligible credits from the FY 1993
expenditures described  in the example above. Thus, in order to use the full $1 million set-aside in this example,
a State would have to provide $500,000 in new funding or in-kind services.

Third Example
Again using the above example, if the State provides $600,000 for the PWSS program above the State match
requirement in FY 1997  (versus $300,000 as stated above), the State could use the $600,000 from FY 1997 and
use $400,000 from FY 1993 as credit for the State match.  In this example, the State would not have to provide
any additional match in cash to take full advantage of this set-aside.
                                                 21

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FESTAL GUIDELINES
February 28, 1997
   i.   Assistance to a public water system to acquire land or a conservation easement for source water
       protection purposes:

   A State may provide assistance, only in the form of a loan, to a public water system to acquire land or
   a conservation easement from a willing party for the purpose of protecting the system's source
   water(s) and ensuring compliance with national drinking water regulations.

   If a State elects to use this set-aside, the State shall develop a priority setting process, or use an
   established priority setting process that meets the same goals, to decide what land or easements can
   be purchased. The process must include a requirement that public water systems demonstrate how
   the land or easements to be purchased will directly promote public health protection  and/or
   compliance with national drinking water regulations. The State must seek public review and comment
   on this process. Furthermore, the State must identify specific parcels of land or easements purchased
   in the Biennial Report.

   ii.  Assistance to a community water system to implement voluntary, incentive-based source water
       quality protection measures:

   A State may make a loan to assist a community water system implement voluntary,  incentive-based
   source water protection measures in areas delineated under a source water assessment program
   described in section 1453 and for source water petitions. Only community (as opposed to
   noncommunity) water systems are eligible for this assistance.  A State may establish a source water
   petition program and receive petitions from owners/operators or local governments requesting State
   assistance in the development of a voluntary, incentive-based  partnership among systems, local
   governments, and others likely to be affected by the management measures. Only pathogenic
   organisms, chemicals in source water at levels above a drinking water standard, or chemicals that are
   not reliably and consistently below the drinking water standard can be identified as contaminants in a
   petition.

   If a State elects to use this set-aside, the State must develop a list of systems that will receive loans,
   giving priority to projects that promote compliance and public health protection, and  then seek public
    review and comment on this list.

    iii.   Provide funding to delineate  and assess source water protection areas:

   A State may use up to 10 percent of its FY 1997 capitalization grant to delineate and/or assess
    source water protection areas for public water systems in accordance with section 1453.
    Assessments include the identification of potential sources of contamination within the delineated
    areas  These assessment activities, which primacy States are required to undertake, are limited to
    the identification of contaminants regulated under the SDWA, or unregulated contaminants, selected
    by the State, at its discretion, when the State determines that they may pose a threat to public health.
    Funds set aside for this purpose shall be obligated by the State within four fiscal years after the State
    receives the grant from which the funds are set-aside.
                                               22

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  FINAL GUIDELINES
                                                                                February 28,1997
     Funds are available from the capitalization grant only for FY1996 and FY 1997 to delineate and
     assess source water protection areas in accordance with section 1453.1  Since there are no FY 1996
     funds available for the DWSRF program, FY 1997 is the only year when funds will be available for this
     important activity. EPA encourages States to determine the level of activity necessary to
     delineate and assess their source water protection areas, and determine the level of funding
     necessary to complete these activities. If needed. States should take up to 10 percent of fiscal
     year capitalization grant allowed by law. EPA will review the State's determination as part of the
     capitalization grant application review.

     iv.  To support the establishment and implementation  of wellhead protection programs:

     The State may make expenditures from the set-aside account to establish and implement wellhead
     protection programs (WHP) under section 1428. Funds can be used to establish a WHP program,
     which a State must then submit to the EPA Region for approval. The WHP activities to be funded'
     must be identified in the I UP.

     v.  To provide funding to a Public Water System to implement a technical or financial assistance
        under the capacity development strategy:

     A State may  provide assistance to a public water system as part of a capacity development strategy
     under section 1420(c).

     e.  Movement of funds between the Fund and set-aside account after award of capitalization grant

     If provided for in the IUP, a State may move funds among set-aside activities or from the set-aside
     account(s) to the Fund after receiving an approved amendment to the capitalization grant.  Once
     payments have been made (according to the schedule outlined in the capitalization grant award), the
     project funds will be considered part of the Fund and may only be used for the authorized purposes.

    f.   Transfer  of funds

    Section 302 of the SDWA Amendments of 1996 allows a State to transfer up to 33% of the
    capitalization grant made to a State under section 1452(m) to the CWSRF or an equivalent amount
    from the CWSRF to the DWSRF.  This transfer is at the Governor's discretion and cannot occur until
    at least a year after the State has received its first DWSRF capitalization grant.  EPA plans to issue
    guidelines at  a later date concerning this transfer provision.
        States may use funds from this set-aside for the development of Total Maximum Daily Loads (TMDL's) in limited
circumstances. The State must establish a policy of allowing use of set-aside funds to develop TMDL's only if a clear cause and
effect relationship can demonstrate that development of the TMDL is essential to public health protection and continuing
compliance with national primary drinking water regulations. Funding TMDL's through source water set-asides is only eligible if it
will prevent or reduce source water contamination or enhance the efficiency of the drinking water treatment process. In this
context, TMDL activity should be weighed against other source water assessment and delineation priority activities. State source
water assessment programs submitted to EPA that propose to include TMDL activity shall ensure that the development of TMDL's
does not delay the completion of the source water assessments.


                                                23

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FINAL GUIDELINES
February 28,1997
                                       TABLE 2
              Set-Asides and funding ceilings in the Drinking Water SRF Program
Before allotment to States
Programmatic t, ^W0 <-"; * v '"-1 "-' - V"-- " ,-'; 	 '...'; 	 -....,. 	 / 	 1 	 ,.: 	 '..'•
$ 10 Million
$ 2 Million
up to 2%
Undecided
^rojec&P"'*^ *
1.5%
Health effects research
Unregulated contaminant monitoring (starting in FY 1998)
Technical assistance to small systems (optional) 1
Reimbursement of operator training expenses projects
*r* ' VY^* o'"> % « ' - ' ' / '- '.....
Indian Tribes/Alaska Native Villages
Based on Allotment to States
Protects "'^f^'-^ ^'s^^s|5^*|»^^\Xj.t !!., "•$• ^ '^%, ~* ,- '"•(" .• i '', '• ', ' y', -','•. ••',"<; »/ ^' '','..' ^ .'..•-.
1.0%
0.33%
District of Columbia
Virgin Islands, Territories
After Allotment to States
vprogramma«eA ^ ^x'-'!'v r* * "--- - '"' -"- *• - -•."'--',, **,^"; , - ;
up to 4%
up to 2%
up to 10%
up to 15%
Projects^ "i;:
up to 30 %
Administration of DWSRF program and technical assistance
Technical assistance to small systems
Assistance to State programs (PWSS, SWP, capacity development, operator
certification.)
Combination of the following:**
• loans for public water systems to acquire land or conservation easements
• loans for community water systems to implement SWP measures or to implement
recommendations in SW petitions
• technical and financial assistance to public water systems for capacity
development
• expenditures to delineate or assess SWP areas.
• expenditures to establish and implement wellhead protection programs
"Each activity separately can receive no more than 10% of the capitalization grant amount
,f%<^t ~*V ';? V1- >* -*\ , *, '' <
Loan subsidies for disadvantaged communities
Based on Fund Amount
Profe&e *- vx\-?rT/^\^v^!', v" '---., ,' " .> , -\-, ' %
minimum 15%
Loans toward small systems (population <1 0,000) under Section 1452
   Cap at $15 Million when combined with funds appropriated under Section 1442.

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FINAL GUIDELINES
                                                                            February 28, 1997
                                                       Table 3
                                             DWSRF SET-ASIDES
                      APPROPRIATION
                  Allotment to States to carry out
                         Section 1452
                                                             SET-ASIDES

                                        * 1.5% for grants to Indian Tribes [1452(i)]
                                        * Up to 2.0% for small system technical assistance [1452 (q)]
                                        * $10 million for health effects research [1452(n)]
                                        * Beginning in FY 1998, $2 million for monitoring unregulated
                                          contaminants [1452(0)]
                                        * Operator training ($ unknown)
                                                          ALLOTMENTS

                                             * 1% of Allotment to DC [1452(a)(1)(D)]
                                             * 0.33% of Allotment to Territories [1452 (j)]
                       WITHHOLDINGS
                                                   INTENDED
                                                   IISF PI flM
      20% STATE
        MATCH
        [1452(e)]
       (based on
      capitalization
         grant)
  CAPITALIZATION
      GRANT

302 Transfer (see note)
                                   DWSRF
                     115% of fund available for small systems
                     ' 30% can be used for disadvantaged
                      subsidies (based on capitalization grant)
                                                               4% of allotment for administration [1452(g)(2)]
                                                                          (based on allotment)
                                                                10%, if matched (one to one) by State for
                                                                [1452(g)(2)] activities (based on allotment)
Up to 2% for technical assistance to small
systems [1452(g)(2)] (based on allotment)
                                        15% for [1452(k)] activities (based on capitalization
                                                           grant)
                          14S2(k) loan activities (optional)
                                                                             Loan repayments from:
                                                                             * SW Protection Measures
  Note: The Governor of a State may transfer up to 33% of the DWSRF capitalization grant amount to the CWSRF or an equivalent
  amount may be transferred from the CWSRF to the DWSRF, to he used for eligible Fund activities. If Clean Water funds are used
  for DWSRF set-asides, the maximum amount of funds available for these purposes is the amount stated in Section 1452.
                                                          25

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FINAL GUIDELINES
                              February 28,  1997
                                                        Table 4
                                            SET-ASIDES EXAMPLE
        20% STATE   .
       MATCH [1452(e)]
          (based on
      capitalization grant)

          $200,000
                             CAPITALIZATION GRANT

                                   302 Transfer

                                   $1,000,000
                                                                       4% of allotment for administration [1452(g)(2)]
                                                                                (based on allotment)

                                                                                     $40,000
                                                                        10%, if matched (one to one) by State for
                                                                        [1452(g)(2)J activities (based on allotment)

                                                                                     $100,000
   Up to 2% for technical assistance to small
   systems [1452(g)(2)] (based on allotment)

                $20,000
15% for [1452(k)] activities (based on capitalization
                 grant)

                $150,000
                                       DWSRF    :
                     ' 15% of fund available for small systems
                     ' 30% can be used for disadvantaged subsidies
                      (based on capitalization grant)

                     '$890,000 available
                     ' men. of $133,500 of funds for small systems
                     ' max. of $300,000 of capitalization grant for
                      disadavantaged communities
                                         $150,1
                                         plus i
                              1452(k) loan activities (optional)
                                                                                      Loan repayments from:
00
terest
                                                                                      * SW Protection Measures
    Note: The Governor of a State may transfer up to 33% of the DWSRF capitalization grant amount to the CWSRF or an equivalent
    amount may be transferred from the CWSRF to the DWSRF, to be used for eligible Fund activities. If Clean Water funds are used
    for DWSRF set-asides, the maximum amount of funds available for these purposes is the amount stated in Section 1452.
                                                             26

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   C.  Types of Financial Assistance That the Fund May Provide

   A Fund may make loans for project construction, purchase or refinance local debt obligations,
   guarantee or purchase insurance for local debt issues, provide revenue for or secure State bonds if
   the proceeds of the bonds are deposited in the Fund, and earn interest on Fund accounts (section
   1452(f)).
   1.  Loans

   A Fund may make loans with interest rates that are less than or equal to the market interest rate,
   including zero percent loans. The State is responsible for identifying in the IUP the method it will use
   to determine the "prevailing" market interest rate at the time a particular loan is executed with an
   assistance recipient.  As part of its capitalization grant application, the State should outline its policy
   with respect to interest rate terms for various potential categories of assistance recipients.

   A State may issue separate loans for planning, design, and construction costs. If the State had made
   prior loans to a recipient, the Fund may "roll over" the separate loans into a subsequent loan for
   construction. A State may also provide "incremental" assistance to finance a multi-year construction
   activity (e.g., for particularly large, expensive projects).

   a.  Repayment of loan

   Assistance recipients (borrowers) must begin repayment of the loan(s),  as provided in the loan
   agreement, not later than one year after completion of the project. A project is considered complete
   when the operations are initiated or are capable of being initiated.  Recipients must complete loan
   repayment not later than 20 years after the completion of the project.  However, States which
   establish a disadvantaged community loan program pursuant to section 1452(d) may provide loans to
   qualified recipients for up to 30 years,  as long as the period of the loan does not exceed the expected
   design life of the project.

   b.  Dedicated repayment source

   Each loan recipient (except for disadvantaged subsidy portion) must establish a dedicated source of
   revenue (or in the case of a privately owned system, demonstrate that there is adequate security) for
   repayment of the principal and interest due on the loan which is consistent with local ordinances and
   State laws. In most cases, this will be a pledge of revenues from user charges, while for privately
   owned systems, it could include the pledge of accounts  receivable and proceeds therefrom.

   c.  Financial security of privately-owned systems

   Eligible water systems that are privately owned must demonstrate that there is adequate security to
   assure repayment of the loan. In some cases a State may determine that it is appropriate to require
   such systems to provide credit enhancements, to pledge a variety of collateral, and/or to provide other
   types of security, such as corporate or personal guarantees.
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   d.  Financial, technical, and managerial capability analysis

   The State shall review the overall financial capability of the recipient to repay the loan as well as
   technical and managerial capability of the assistance recipient to maintain compliance with the SDWA
   (section 1452(a)(3)(A)(i)). Findings of the financial capability analysis may be used to determine the
   terms of assistance for applicants. The State may not provide assistance to any system that does not
   have the technical, managerial or financial capability to ensure compliance with the SDWA or is in
   significant non-compliance with any drinking water standard or variance. However, if assistance will
   ensure compliance or if the system's owner or operator agrees to take appropriate measures to
   ensure that the system has the necessary capability, the State may provide assistance.

   e.  Disadvantaged communities

   A Fund may provide additional loan subsidies (e.g., principal forgiveness, negative interest rate loans)
   to benefit communities meeting the definition of "disadvantaged" or which the State expects to
   become disadvantaged as a result of the project. A "disadvantaged community" is one in which the
   entire service area of a public water system meets affordability criteria established by the State after
   public review and comment (section 1452(d)). The Administrator shall publish information, within 18
   months after enactment of the SDWA amendments, to assist States in developing affordability criteria.
   EPA will undertake this effort in consultation with States and the Rural Utilities  Service.

   The State should take its affordability criteria into account when deciding the level of subsidy a
   disadvantaged community will receive, in order to  make the loan  affordable. Where capability of the
   system is an issue, the State must ensure that, prior to necessary funding and any other actions, the
   system has adequate financial, technical and managerial capability to maintain compliance.

   The value of subsidies that a Fund provides during a particular fiscal year's capitalization grant cannot
   exceed 30 percent of the amount of the capitalization grant for that year (1452(d)(2)).  Subsidies
   under this provision cannot be banked for future use.

   f.  Project funding for small systems

   The Statute requires  that a State use a minimum of 15 percent of all dollars credited to the Fund to
   provide loan assistance to small systems that serve fewer than 10,000 persons. The 15 percent
   minimum is based on the level of DWSRF funds that the State expects to have available for funding in
   the fiscal year addressed by the IUP.


   2.  Buy or refinance existing debt obligations

   A Fund may buy or refinance  debt obligations of municipal, intermunicipal or interstate agencies,
   where the initial debt was incurred and construction started after July 1,1993 (section 1452(f)(2)).
   Private systems are not eligible for refinancing under section 1452(f)(2). Refinancing may entail
   purchasing existing municipal debt such that the proceeds of the transaction may be used to call the
   bonds.  This provision is intended to encourage projects to proceed using their own means of
   financing in advance of the availability of Fund assistance, by offering the prospect of project
   refinancing at better financial terms at a later date.
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   Projects incurring debt and initiating construction between July 1, 1993 and the effective date of a
   State capitalization grant must meet the eligibility requirements of section 1452 to be eligible for
   refinancing.  Where the original debt for a project was in the form of a multi-purpose bond incurred for
   purposes in addition to eligible purposes under section 1452, a Fund may provide refinancing only for
   eligible purposes, not for the entire debt

   If a State has credited repayments of loans made under a pre-existing State loan program as part of
   its State match (see V.A.), the State cannot also refinance the projects under the DWSRF.  If the State
   has already counted certain projects toward its State match which it now wants to refinance, the State
   must provide replacement funds for the amounts previously credited as match.

   The State should seek the advice of bond counsel or tax attorneys to ensure that these refinances do
   not conflict with Federal law.
   3. Guarantee or purchase insurance for local debt obligations

   A Fund may provide assistance to improve the marketability of local debt obligations or to reduce
   interest rates to attract potential buyers of the bonds and loans (section 1452(f)(3)). These credit
   enhancements may take the form of guarantees or purchases of insurance, which are available from a
   number of insurance companies. Assistance of this type is limited to local debt obligations that are
   undertaken to finance projects eligible for assistance under section 1452.


   4. A source of revenue or security for payment of Fund debt obligations

   The State may use assets deposited in the Fund to "leverage" (i.e., increase) the total amount of
   funds available within the Fund (section 1452(f)(4)). Leveraging is accomplished by using Fund
   assets as a source of revenue or security for the payment of the principal and interest on revenue or
   general obligation bonds issued by the State. The net proceeds of the sale of the bonds secured by
   the Fund must be deposited into the Fund.

   The security may be provided by any of the assets of the Fund, including an existing Fund balance
   and future revenues from loan repayments. The State may also choose to borrow against the
   repayment stream from outstanding loans made from an initial set of capitalization grants (or part of
   the capitalization grant or State match), thus increasing the financial resources of the Fund much
   sooner than would otherwise be possible. Bonds may be issued by an instrumentality of the State,
   including the State agency responsible for administering the Fund.

   Note that the use of a capitalization grant to leverage does not, in and of itself, satisfy any
   requirements on the use of DWSRF funds. The proceeds of the bond issue must ultimately be used
   for providing loans and other assistance to satisfy the requirements of section 1452.

   For the purposes of this section, "net proceeds" is defined as the funds raised from  the sale of the
   bonds minus issuance costs (e.g., the underwriting discount, underwriter's legal counsel fees, bond
   counsel fees, financial advisor fees, rating agency fees, printing of disclosure documents/bond
   certificates, trustee banks' fees, various forms of credit enhancement and enhancement and other
   costs that may be incurred by a State agency incidental to the bond issuance).
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   Funds in a CWSRF cannot secure bonds issued for DWSRF assisted projects, and vice-versa, where
   there is the potential that assets in one Fund could be used for a purpose not authorized by the law
   establishing that Fund. Funds in a CWSRF cannot be used to cure a default on a project receiving
   DWSRF assistance because it is not ah authorized type of assistance, nor is the project eligible,
   under title VI of the Clean Water Act.  However, States may propose other leveraging methods relying
   on one or both Fund's assets where the potential for using those assets for an unauthorized purpose
   does not exist. For example, a State may use the authority to reserve one program's capitalization
   grant funds under section 302 of the SDWA Amendments to further secure a bond issued for one or
   both SRF programs. Such leveraging.methods must be reviewed by the Regional Office and by EPA .,
   Headquarters before they can be implemented by the State.


   5. Earn interest on Fund accounts

   Sections 1452(c) and 1452(f)(5) authorize the State to earn interest on Fund accounts prior to
   disbursement of assistance (e.g., on reserve accounts used as security or guarantees). Dollars
   deposited must not remain in the Fund primarily to earn interest. States and municipalities should
   obtain the legal opinion of a bond counsel or tax attorney with respect to using the Fund to earn
   interest on the proceeds of a tax-exempt issue.

   There are limits to the type of investments that a State can make with Fund accounts. Funds not
   required for current obligation or expenditure must be invested in interest bearing obligations (section
   1452(c)). The authority to earn interest does not include investment methods that earn dividends or
   yields other than  interest.  Most States have laws that restrict the eligible investments of these fund
   accounts. Furthermore, if a State engages in a leveraged program, there may  be restrictions on
   eligible investments in the trust indenture securing the bonds. In certain cases, the Federal tax code
   may limit the investments a leveraged program can make with fund accounts.
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III.  ELIGIBLE SYSTEMS AND PROJECTS
    A. Eligible systems

    Drinking water systems that are eligible for Fund assistance are community water systems, both
    privately and publicly owned, and nonprofit noncommunity water systems.  Federally-owned systems
    are not eligible to receive Fund assistance (section 1452(a)(2)).

    Fund managers should seek tax advice if they plan to issue bonds, to ensure that the requirements of
    the Private Activity Use Rule are met, particularly with regard to funding eligible private systems.

    Drinking water systems that have components of their systems in more than one State are eligible to
    receive funding after consultation with the regulatory agencies involved.
    B. Eligible Projects
    1.  Compliance and public health

    A DWSRF may provide assistance only for expenditures (not including monitoring, operation, and
    maintenance expenditures) of a type or category which will facilitate compliance with national primary
    drinking water regulations applicable to the system under section 1412 or otherwise significantly
    further the health protection objectives of the Act (section 1452(a)(2)).

    Projects to address SDWA health standards that have been exceeded or to prevent future violations
    of the rules are eligible for funding. These include projects to maintain compliance with existing
    regulations for contaminants with acute health effects (i.e., the Surface Water Treatment Rule, the
    Total Coliform Rule, and nitrate standard) and regulations for contaminants with chronic health effects
    (i.e., Lead and Copper Rule, Phases I, II, and V rules, and safety standards for total trihalomethanes,
    arsenic, barium, cadmium, chromium, fluoride, mercury, selenium, combined radium-226, -228, and
    gross alpha particle activity).

    Projects to replace aging infrastructure are also eligible if they are needed to maintain compliance or
    further the public health protection goals of the Act.  Examples of these include projects to:

       rehabilitate or develop sources (excluding reservoirs, dams, dam rehabilitation and water rights) to
       replace contaminated sources;
       install or upgrade treatment facilities if, in the State's opinion, the project would improve the quality
       of drinking water to comply with primary or secondary standards;
       install or upgrade storage facilities, including finished water reservoirs, to prevent microbiological
       contaminants from entering the water system; and
    •   install or replace transmission and distribution pipes to prevent contamination caused by leaks or
       breaks in the pipe, or improve water pressure to safe levels.

    Projects to consolidate water supplies - for example, when individual homes or other public water
    supplies have a water supply that is contaminated, or the system is unable to maintain compliance for
    financial or managerial reasons ~ are eligible for DWSRF assistance.
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   The purchase of a portion of another system's capacity is eligible for a loan, if it is the most cost-
   effective solution.
   2. Loan assistance to systems that meet the definition in section 1401 (b)

   Certain entities that deliver water through constructed conveyances, other than piped water systems,
   are not currently considered public water supplies.  The SDWA Amendments would classify such
   systems as public water systems unless they comply with provisions of 1401 (b).  These systems are
   eligible for section 1452 funds for the purposes specified in 1401 (b).


   3. Land acquisition

   Land is eligible only if it is integral to a project that is needed to meet or maintain compliance and
   further public health protection.  In this instance, land that is integral to a project is only the land
   needed to locate eligible treatment or distribution projects.  In addition, the acquisition has to be from a
   willing seller. Land that is necessary for source water protection may be eligible to receive a loan
   under section 1452(k).

   The cost of complying with the Uniform Relocation Assistance and Real Property Acquisition Policies
   Act of 1970 (the Uniform Act) is  an eligible cost to be included in a DWSRF program loan.  (See
   section on cross-cutters for a more detailed discussion of the Uniform Act.)


   4. Planning and design of a drinking water project

   A Fund may provide assistance for the costs of project planning, design and other related costs. The
   provision of assistance for design and planning costs does not guarantee a system that the DWSRF
   program will provide funding for the construction of the project. The State may choose to combine the
   loan for planning and design with a construction loan.

   Costs to municipalities for preparing environmental assessment reports may be included as part of the
   costs of planning a project. Costs incurred by the State in reviewing the environmental assessments
   are considered DWSRF administrative costs.
   5.  Restructuring of systems that are in noncompliance or that lack the technical,
      managerial and financial capability to maintain the system

   A Fund may provide assistance to an eligible public water system to consolidate with other public
   water system(s) only if the assistance will ensure that the system returns to and maintains compliance
   with SDWA requirements (section 1452(a)(3)(B)).

   If the system does not have the technical, managerial, and/or financial capability to ensure
   compliance, or is in significant noncompliance, the system may receive assistance only if (1) the
   assistance will ensure compliance, or (2) the owner or operator of the system agrees to undertake
   appropriate changes in operations. These changes include consolidation or management changes
   that will ensure that the system has the technical, managerial, and financial capability to ensure and
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   maintain eompliance with SDWA requirements. Costs associated with consolidation, such as legal
   fees and water buy-in fees, are eligible for funding.

   A State should establish criteria or guidelines to help assess what types of operational or
   management changes may be appropriate for a water system. Further, a State should define when a
   system would be a good candidate for physical consolidation to solve a compliance or long-term
   financial issue, or when a system could consolidate by other means, such as through management
   consolidation.
   C.  Projects not Eligible for Funding

   The Fund cannot provide funding assistance for the following projects and activities:

   •   Dams, or rehabilitation of dams;
   •   Water rights, except if the water rights are owned by a system that is being purchased through
       consolidation as part of a capacity development strategy;
       Reservoirs, except for finished water reservoirs and those reservoirs that are part of the treatment
       process and are located on the property where the treatment facility is located;
   •   Laboratory fees for monitoring;
   •   Operation and maintenance expenses;
   •   Projects needed mainly for fire protection;
       Projects for systems that lack adequate technical, managerial and financial capability, unless
       assistance will ensure compliance;
       Projects for systems in significant noncompliance, unless funding will ensure compliance;
   •   Projects primarily intended to serve future growth.


   1.  Lack of technical, managerial and financial capability

   A Fund may not provide any type of assistance to a system that lacks the technical, managerial or
   financial capability to maintain SDWA compliance, unless the owner or operator of the system agrees
   to undertake feasible and appropriate changes in operation or if the use of the financial assistance
   from the DWSRF will ensure compliance over the long-term (section 1452(a)(3)(B)(i)). The State shall
   develop a capacity program to  evaluate each  system to be funded to ensure it has adequate capacity
   to receive funding.


   2.  Significant noncompliance

   A Fund may not provide assistance to any system that is in significant noncompliance with any
   national drinking water regulation or variance  unless the State conducts a review and determines that
   the project will enable the system to return to compliance and the system will maintain an adequate
   level of technical, managerial and financial capability to maintain compliance (section
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   3. Growth

   A Fund cannot provide assistance to finance the expansion of any drinking water system solely in
   anticipation of future population growth (section 1452(g)(3)(C)). However, assistance may be
   provided to address population growth expected to occur over the useful life of the facility to be
   funded. In determining whether or not a project is eligible for assistance, the State must determine the
   primary purpose of the project. If the primary purpose is to supply or attract growth, the project is not
   eligible to receive DWSRF funds.  If the primary purpose is to solve a compliance or public health
   problem, the entire project, including the portion necessary to accommodate a reasonable amount of
   growth over its useful life, is eligible. In reviewing the proposed project, the State should  review the
   basis for, and  reasonableness of, the population projections.

   A State must also consider the extent of current risk to public health in establishing funding  priorities.
   Consequently, if a project includes substantial growth, it must be placed at the lower end  of the priority
   list.  It would be contrary to the intent of Congress, as reflected in the "anticipation of growth"
   provision, to fund a project with the prospect of a substantial amount of growth ahead of a project
   where  a significant portion is attributable to rectifying a current health threat.


   D. Compliance Without DWSRF Funding

   The inability or failure of any public water system to receive assistance from a Fund or any other
   funding agency,  shall not alter the obligation of a drinking water system to comply in a timely manner
   with all applicable drinking water standards and requirements of section 1452 (section 1452(1)).
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IV. STATE/PROJECT LEVEL AUTHORITIES
   A.  Cross-cutting Federal Authorities

   There are a number of Federal laws, executive orders and government-wide policies that apply by
   their own terms to projects and activities receiving Federal financial assistance, regardless of whether
   the statute authorizing the assistance makes them applicable. These "cross-cutting Federal
   authorities" (cross-cutters) include environmental laws such as the National Historic Preservation Act
   and the Wild and Scenic Rivers Act, and social and economic policy authorities such as Executive
   Orders on Equal Employment Opportunity and government-wide debarment and suspension rules.

   A few cross-cutters apply by their own terms only to the State as the grant recipient (e.g., Drug-Free
   Workplace Act, Pub. L. 100-692 § 5152 et. seq.), because the authorities explicitly limit their
   application to grant recipients.  In general, however, the cross-cutters will apply to projects and
   activities receiving assistance from the Fund.

   The Fund may consist of funds from several sources: Federal grant dollars, State match amounts,
   loan repayments, and, perhaps, bond proceeds. It is therefore difficult to identify which projects are
   receiving Federal financial assistance and are thus, subject to the cross-cutters. Consequently, the
   cross-cutters will apply to an amount of funds equaling the amount of the Federal grant.
   Requirements imposed by the cross-cutters must be met by projects whose cumulative DWSRF
   funding is equivalent to the amount of the capitalization grant ("equivalency projects").

   The concept of equivalency was developed for the CWSRF program, although in that program it had
   an additional feature. In the CWSRF program, equivalency projects were subject to a number of
   specific requirements listed in the Clean Water Act (section 602(b)(6)), as well as the cross-cutters. In
   the DWSRF program, the concept of equivalency is only used to describe which projects must comply
   with cross-cutters and which must undergo a tier one environmental review (see IV.B.)

   Projects funded with DWSRF monies in amounts greater than the capitalization grant are not subject
   to these requirements, but States that apply cross-cutters to projects whose cumulative funding is
   greater than the amount of the Federal capitalization grant may bank this excess to meet future
   requirements.

   All programs, projects and activities undertaken by the DWSRF program, including those undertaken
   as non-equivalency projects, are subject to Federal anti-discrimination laws, including the Civil Rights
   Act of 1964, section 504 of the Rehabilitation Act of 1973 and the Age Discrimination Act of 1975.

   Because of the similarities between the DWSRF and  CWSRF programs, and because the State plays
   a more substantial role in these two programs than in other Federal assistance programs (particularly
   in its relationship with assistance recipients), the method for applying cross-cutters in the DWSRF
   program will be the same as that used in the CWSRF program.  The Agency will remain ultimately
   responsible for ensuring that assistance recipients comply with the cross-cutters, but will carry out this
   responsibility mainly though its annual oversight and approval roles. Day-to-day responsibility for
   overseeing funding recipients' implementation of the cross-cutters will fall upon the State. For
   example,' where a cross-cutter requires consultation with another Federal agency, such as the U.S.
   Fish and Wildlife Service, the State will take this action initially. If a compliance issue cannot be
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   resolved for a particular project through that consultation, then the State must seek the Regional
   Office's assistance in settling the matter. The most recent list of cross-cutters that apply is attached in
   Appendix A.


   B.  Environmental Reviews

   The environmental review principles developed for the CWSRF program will provide the basis for the
   development of a State environmental review process (SERF) in the DWSRF program. The SERF
   that applies to Fund equivalency projects must be the same as the process for CWSRF equivalency
   projects. Non-equivalency projects must also undergo an environmental review, but the State may
   elect to apply an alternative SERF toihese projects.


   1.  Equivalency projects

   Equivalency projects are reviewed under a SERF that is functionally equivalent to the review followed
   by the Agency under the National Environmental Policy Act (NEPA). The State may elect to apply the
   procedures at 40 CFR Part 6, Subpart E and related subparts, or apply its own "NEPA-like" SERF for
   conducting environmental reviews developed for the CWSRF program.  For equivalency projects, a
   SERF must contain the elements described below.

   Legal foundation:  The State must have the legal authority to conduct environmental reviews of
   construction projects receiving Fund assistance. The legal authority and supporting documentation
   must specify:

   •   The mechanisms to implement mitigation measures to ensure that a project is environmentally
       sound;

   •   The legal remedies available to the public to challenge environmental review determinations and
       enforcement actions;

   •   The State agency that is primarily responsible for conducting environmental reviews;  and

   •   The extent to which environmental review responsibilities will be delegated to local recipients and
       will be subject to oversight by the primary State agency.

   Interdisciplinary approach: The State must employ an interdisciplinary  approach for identifying and
   mitigating adverse environmental effects including,  but not limited to, those associated with cross-
   cutting Federal environmental authorities.

   Decision documentation: The State must fully document the information, processes and  premises that
   influence its decisions to:

   •   Proceed with a project contained in a finding of no significant impact (FNSI) following
       documentation in an environmental assessment (EA);

   •   Proceed or not proceed with a project contained in a record of decision  (ROD) following
       preparation of a full environmental impact statement (EIS);
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   •   Reaffirm or modify a decision contained in a previously issued categorical exclusion (CE),
       EA/FNSI or EIS/ROD following a mandatory 5 year environmental reevaluation of a proposed
       project; and

   •   If a State elects to implement processes for either partitioning an environmental review or CE from
       environmental review, the State must similarly document these processes in its proposed SERF.

   Public Notice and Participation: The State must provide public notice when a CE is issued or
   rescinded, a FNSI is issued but before it becomes effective, a decision issued 5 years earlier is
   reaffirmed or revised, and prior to initiating an EIS. Except with respect to a public notice of a
   categorical exclusion or reaffirmation of a previous decision, a formal  public comment period must be
   provided during which no action on a project will be allowed.

   A public hearing or meeting must be held for all projects except for those having little or no
   environmental  effect.

   Alternatives  Consideration: The State must have evaluation criteria and processes which allow for:

   •   Comparative evaluation among alternatives, including the beneficial  and adverse consequences
       on the existing  environment, the future environment and individual sensitive environmental issues
       that are identified by project management or through public participation; and

   •   Devising appropriate near-term and long-range measures to avoid, minimize or mitigate adverse
       impacts.


   2.   Non-equivalency projects

   The State may elect to apply an alternative SERF to non-equivalency construction projects assisted
   by the Fund, provided that the process:

   •   Is supported  by a legal foundation which establishes the State's authority to review construction
       projects;

   •   Responds to other environmental objectives of the State;

   •   Provides for comparative evaluations among alternatives and accounts for beneficial and adverse
       consequences  to the existing and future environment;

   •   Adequately documents the information,  processes and premises that influence an environmental
       determination; and

   •   Provides for notice to the public of proposed projects and for the opportunity to comment on
       alternatives and to examine environmental review documents. For projects determined by the
       State to be controversial, a public hearing must be held.
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   3.  EPA approval and review process

   The RA must review and approve any State "NEPA-like" and alternative procedures to ensure that the
   requirements for both equivalency and non-equivalency projects have been met. The RA will conduct
   these reviews on the basis of the criteria for evaluating NEPA-like reviews contained in Appendix B to
   these guidelines.  Because these  criteria are also used in the CWSRF program (Appendix A to the
   CWSRF regulations), a State may simply adopt those for the DWSRF program. Significant changes
   to State environmental review procedures must be approved by the RA. The approved SERF may be
   incorporated in the State's operating agreement,  if it elects to prepare one. (See I.D. above)

   States should establish administrative procedures for monitoring, collecting and summarizing
   environmental review information  and provide documentation of these activities in the Biennial Report.
   EPA's annual review will include a review of a sample of DWSRF projects to verify the application and
   the adequacy of the SERP.
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V. FUNDING PROCESS
    A. 20 Percent State Match

    Except for FY 1997 funds, States must deposit the 20% State match into the Fund on the date of or
    before receiving  payments under the capitalization grant.  In general, State match deposits must be in
    cash.  When a State opts to use a "letter of credit" mechanism for its State match, payments to this
    letter of credit account must be made proportionally on the same schedule as the payments of Federal
    funds (as outlined elsewhere in these guidelines) in the capitalization grant.  Monies from this State
    match letter of credit must be drawn into the Fund as monies are drawn on the Federal letter of credit
    (known as the automated clearinghouse account (ACH)).

    When cash is drawn from the Federal ACH for the set-aside account only, the State may deposit its
    proportional share into the Fund in the form of a note receivable rather than actual cash. The note(s)
    must be converted to cash prior to the time when cash is drawn from the federal ACH to the project
    fund, in order to  meet the State match requirement.

    For grant payments made to the State from funds appropriated in FY 1997, the State may defer
    deposit of its matching amount to no later than September 30, 1999.  This flexibility is provided to
    States which may need additional time to secure State funding for the required matching amount.
    Note that even if the State defers deposit of its matching amounts, it must identify the source of its
    matching funds in the capitalization grant application and agree to provide the State match for grant
    payments already  received from the FY 1997 appropriations by September 30,1999.  Thus, States
    will have to match  the funds that have been received as payments or are drawn down in cash, in order
    to reach the proportional match requirement of 20%, before additional funds can be expended from
    the federal ACH.

    States may acquire the matching amount from a variety of sources, including legislative
    appropriations, proceeds from State issued bonds, revenues from State taxes or assessments, and
    funds maintained in other State accounts. Bonds issued by the State to derive the match may be
    retired from the interest payments made to the Fund on loans awarded by the Fund if the net
    proceeds from the State issued bonds are deposited in the fund.  Loan repayments including principal
    and interest of a loan must be repaid to the Fund; with only the interest portion of repayments and
    interest earnings of the Fund as a source of funds to retire State bond issues that provide the State
    match. This flexibility to retire State debt should not be used to the extent that it endangers the long
    term financial goals and objectives, and financial condition of the DWSRF program, as described in
    the IUP.  If the State provides a match in excess of the required amount,  the excess balance may be
    banked toward match requirements associated with subsequent capitalization grants.

    The State may already manage a  dedicated revolving fund which provides assistance for activities
    consistent with section 1452(a)(2) of the SDWA. The State may  credit toward its match requirement
    State monies deposited into this dedicated fund between July 1,1993 and prior to the receipt of a
    capitalization grant under section 1452(a) of the SDWA if:

        (1)  the monies were deposited in an SRF that subsequently received a capitalization grant and, if
            the deposit was expended, it was expended in accordance with section 1452 of the SDWA;
        (2)  the monies were deposited in a separate fund that has not received a capitalization grant,


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          they were expended in accordance with section 1452 of the SDWA and an amount equal to all
          repayments of principal and payments of interest from these loans will be deposited in the
          Federally capitalized fund; or
       (3) the monies were deposited in a separate fund and used as a reserve consistent with section
          1452 and an amount equal to the reserve is transferred to the Federally capitalized fund as its
          function is satisfied.
   B.  State Match for the 1452(g)(2) Set-aside

   The State must agree to deposit into the set-aside account where the 1452(g)(2) funds will be
   deposited, a dollar for dollar match, up to 10 percent of the capitalization grant. States may acquire
   the matching amounts from a variety of sources, in particular, PWSS funding credits discussed in
   II.B.S.b. If additional funds are required, a State may use legislative appropriation or other State
   funds.
   C.  Federal Funding Process
   1.  General

   A State will receive each capitalization grant payment in the form of an increase to the ceiling of funds
   available through a separate Fund account set up in the EPA-Automated Clearing House (EPA-ACH).
   Cash will be transferred to the State from the U.S. Treasury on a reimbursement basis, after the
   assistance recipient has billed the DWSRF program for work completed  and the DWSRF program
   requests reimbursement from EPA. The State then reimburses project assistance recipients for costs
   incurred — a process known as the disbursement from the DWSRF.


   2.  Schedule of payments

   A State must include a payment schedule in its capitalization grant agreement that is based on its
   projection of binding commitments (see below) and use of set-asides in the State's Intended Use  Plan.
   Increases in the ceiling of funds available in the EPA-ACH will be made in accordance with  the
   schedule of payments. All payments will be made by the earlier of 8 quarters from the date of a
   capitalization grant award or 12 quarters from the date of allotment. The schedule of payments
   applies to all funds in the capitalization grant, including those funds that are used for set-aside
   activities.
   3.  Binding commitments

   In order to demonstrate continuing progress in project (both Fund and set-aside projects) initiation,
   and to further the intent of Congress to "commit(s) and expend(s) funds ... as efficiently as possible..."
   (section 1452(g)(3)(A)), the State must agree to enter into binding commitments to provide financial
   assistance under the DWSRF program with assistance recipients. A binding commitment is a legal
   obligation by the State to a recipient of assistance that defines the terms for DWSRF assistance.  The
   binding commitment should include a description of the project to receive financial assistance, the
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   expected terms of the assistance, and expected date of project initiation and project completion.

   Binding commitments must be made in an amount equal to the amount of each grant payment that is .
   deposited into the Fund and State match within one year after the receipt of each grant payment.

   The State must continue to make progress in providing Fund assistance by entering into binding
   commitments equaling the amount of the grant payment and State match within one year after it
   receives a grant payment. To facilitate compliance with this requirement, the State may wish to plan
   for binding commitments equal to the federal capitalization grant less the non-project set-asides plus
   the State match (Federal funds only for the FY 1997 funds).  Then, if some projects are unable to
   proceed for unforeseen reasons, the State will still be able to comply with the requirement. The State
   may make binding commitments for more than the required amount, and bank the "excess" balance
   towards the binding commitment requirements of subsequent grant payments.

   If a State is concerned about its ability to comply with the binding commitment requirement, it should
   notify the RA before it fails to fulfill its responsibility, and propose a revised payment schedule.
   4.  Cash draw

   The ACH process is structured so that neither the DWSRF program nor the assistance recipients will
   be required to provide interim financing on financial transactions of the DWSRF program. Transfer
   procedures have been established to ensure that cash will be in the DWSRF program account within
   two days after the Agency receives a valid request for cash draw from the State. To effect this two
   day transfer, the Agency will only subject requests to account verification. The Agency will not review
   DWSRF program documents (e.g., construction status of projects, adequacy of voucher
   documentation) as part of the cash draw process.

   Cash draws from the DWSRF-ACH are limited by the ceiling available in the DWSRF-ACH. However,
   in the event of an imminent default (e.g.,  debt service payments to bondholders and resulting need for
   a cash draw from a DWSRF-ACH for use as a security or guarantee), the Agency can amend the
   grant agreement and payment schedule to allow the State to draw cash immediately, up to the total
   amount of the DWSRF-ACH committed to the guarantee or security. The DWSRF or the assistance
   recipient must first incur a cost in order for cash to be drawn against the DWSRF-ACH. The State
   may draw cash from the DWSRF-ACH for the proportionate Federal share of eligible costs at the time
   those costs have been incurred.

   The following subsections describe the cash draw rules that apply to the different types of assistance
   a Fund can provide.

   a. Projects

       /. Loans

       The State may draw cash from the DWSRF-ACH when the Fund  receives a request from a loan
       recipient, based on incurred costs, including pre-building and building costs.
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       //. Refinance or purchase of municipal debt

       For completed construction, cash draws will be made at a rate no greater than equal amounts
       over the maximum number of quarters that capitalization grant payments are made, and up to the
       portion of the DWSRF-ACH committed to the refinancing or purchase of the local debt. Cash
       draws for incurred building costs will generally be treated as refinanced costs. With the approval
       of the RA, the State may draw cash immediately when it is prepared to refinance for up to five
       percent of each fiscal year's capitalization grant or two million dollars, whichever is greater, to
       refinance or purchase local debt.

       For projects or portions of projects that have not been constructed, the State may draw cash
       based on incurred construction costs according to the rule for loans.

       For the purchase of incremental disbursement bonds from local governments, cash draws will be
       based on a schedule that coincides with the rate at which construction related costs are expected
       to be incurred for the project.

       ///. Purchase of insurance

       The State may draw cash to purchase insurance as premiums are due.

       iv. Guarantees and security for bonds

       In the event of an imminent default in debt service payments on a guaranteed or secured debt, the
       State can draw cash immediately up to the total amount of the DWSRF-ACH that is dedicated to
       the guarantee or security.  If a balance remains after the default is covered, the State must
       negotiate a revised schedule for the remaining amount dedicated to the guarantee or security.

       In the absence of default, the State can draw cash up to the amount of the DWSRF-ACH
       dedicated for the guarantee or security based on actual construction  cost.  The amount of the
       cash  draw would be the actual construction costs multiplied by the Federal share of the reserve
       multiplied by the ratio of the reserve to either the amount guaranteed or the proceeds of the bond
       issue.

       In addition, in the case of a security, the State can identify a group of projects whose value equals
       approximately the total of that portion of the DWSRF-ACH and the State match dedicated as a
       security. The State can then draw cash based  on the incurred construction costs of the selected
       projects only, multiplied by the ratio of the Federal portion of the security to the entire security.

       Where the cash draw rules discussed immediately above would significantly frustrate a State's
       program, the Agency may permit an exception to these cash draw rules and provide for a more
       accelerated cash draw, where the State can demonstrate that:

       •   there are eligible projects ready to proceed in the immediate future with enough costs to justify
          the amount of the secured bond issue;

       •   the absence of cash on an  accelerated basis will substantially delay these projects;
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       •   if accelerated cash draws are allowed, the Fund will provide substantially more
          assistance; and

       •   the long term viability of the State program to meet water quality needs will be protected.

   When the ACH is used for securing State issued bonds, cash draws cannot be made at a rate greater
   than equal amounts over the maximum number of quarters that payments can be made.  Exceptions
   to this limitation are in cases of default and where cash draws are based on construction costs for all
   projects.

   b. Set-asides

   States may draw down federal funds for set-aside use without the need to provide a State match in
   the form of cash (see V.A.). The one exception is the required one-for-one match, where a State
   elects to use up to 10 percent of the funds to be used for 1452(g)(2)(A-D).  A State must provide the
   match prior to or at the time the State requests the federal funds, which is the same as the
   requirement for the 20 percent State match.
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VI.  REPORTING/REVIEW RESPONSIBILITIES

    Each State must submit a Biennial Report to the Administrator on the State's activities which receive
    funding under section 1452.

    The Administrator has determined that the Agency shall conduct reviews of the DWSRF program on
    an annual basis.  The Annual Review is necessary to carry out the Agency's Federal fiduciary
    responsibilities and to assure that States are implementing the program as efficiently as possible
    (section 1452(g)(3)(A)).  Specific elements of the Agency's Annual Review are outlined below.

    Several other programs may receive funding from the State's allotment, including operator
    certification, small systems technical assistance, source water protection, and wellhead protection.
    Agency review of these other programs shall generally be conducted separately in accordance with
    procedures described in program specific guidelines. The Agency may develop additional guidelines
    to reflect new components for the other eligible programs receiving funds pursuant to section 1452.

    A. State Responsibilities

    1. Biennial Report

    The State should submit its Biennial Report to the RA according to the schedule established in the
    grant agreement.

    The Biennial Report should contain detailed information on how the State has met the goals and
    objectives of the previous two fiscal years as stated in the IUP and grant agreement. The Report
    should provide information on loan recipients,  loan amounts, loan terms, project categories of eligible
    cost, and similar details on other forms of assistance. This information should be provided in a format
    and a  manner that is consistent with the needs of the Regional Office. The Report should also
    describe the extent to which the existing DWSRF program financial operating policies, alone or in
    combination with other State financial assistance programs, will provide for the long term fiscal health
    of the  Fund, attain and maintain compliance with the Safe Drinking Water Act, and carry out other
    provisions specified in the legislation.

    The State must submit a detailed financial report as part of the Biennial Report.  At a minimum, the
    financial report shall include the financial statements and  footnotes required under GAAP to present
    fairly the financial condition and results of operations.

    In addition, the State must establish in its DWSRF program Biennial Report that it has:

       •   reviewed all DWSRF funded projects in accordance with the approved State Environmental
           Review Procedures;

       •   deposited its match (cash or State ACH) on or before the date on which each grant payment
           was  made;

       •   made binding commitments to provide assistance equal to the Federal capitalization grant
           less  set-asides funds plus the State match funds within one year after receiving the grant
           payment, except for FY1997 (100%);
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       •   managed the DWSRF program in a fiscally prudent manner and adopted policies and
          processes which promote the long-term financial health of the Fund(s);

       •   complied with Agency grant regulations (40 CFR Part 31) and specific conditions of the grant;

       •   complied with Federal cross-cutting authorities that apply to the State as a Federal grantee
          and those which flow through to assistance recipients;

       •   provided assistance only to eligible water systems and for eligible purposes under these
          guidelines; and

       •   funded only the highest priority projects listed on the IUP, according to their priority and
          readiness to proceed, and have documented any procedures for by-passing priority projects
          on the IUP.

   The State must provide, in the Biennial Report, all information necessary to demonstrate that the State
   remains eligible to receive its full allotment of funds provided  under section 1452(m). Information on
   the other eligible programs provided in the State's biennial DWSRF program report shall not replace
   reporting requirements of other Agency program-specific guidelines. At its option, the State may wish
   to incorporate by reference or attach copies of the most recent copies of other reports to the Agency
   describing progress under the other eligible programs.

   2. Annual audit

   The State must conduct an annual audit of the Fund, to be prepared by the State or an independent
   auditor in accordance with the standards of the General Accounting Office (otherwise known as
   Generally Accepted Government Auditing Standards). Set-aside monies used for projects,  in
   particular monies loaned out under Section  1452(k)(1)(A), must also be covered by a separate audit..
   Programmatic set-asides may be covered by the Single Audit Act.

   The audits must provide an auditor's opinion on the DWSRF financial statements, a report on internal
   controls and a report on compliance with laws and regulations. The audits may be conducted in
   conjunction with audits conducted under the Single Audit Act.  However, a State's Single Audit report
   alone will not meet the DWSRF audit requirement.

   Those set-asides that are not directly related to the revolving fund should be audited under the
   guidelines of the Single Audit Act, including  OMB Circular A-133 and OMB's Compliance Supplement
   for Single Audits of State and Local Governments.

   3. Information management system

   In conjunction with the States, the Agency shall develop and implement an information management
   system which includes regularly updated data on funds available and assistance provided by the
   DWSRF program. To the extent practical, this system will be coordinated with the implementation of a
   similar effort in the CWSRF program. Once developed, States will be  required to provide information
   for the information system. The Agency will use this information to assess the program on a national
   basis and to monitor State progress in years in which Biennial Reports are not required. In particular,
   the Regional Offices will use the information to assist in conduct of the annual reviews.
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   B. EPA Responsibilities
   1. Annual review of DWSRF program

   EPA will conduct annual reviews of each DWSRF program to assess the success of each program in
   meeting the objectives of section 1452. The purposes of the Annual Review are to (1) assess the
   success of the State's performance of activities identified in the IUP, the State's Biennial Report, the
   Operating Agreement (if used), and the DWSRF program information management system, (2)
   determine how the DWSRF is achieving the intent of section 1452 and the overall goals and
   objectives of the SDWA as amended, (3) determine compliance with the capitalization grant
   agreement, and (4) assess the financial status of the Fund. The time period for conduct of Agency
   Annual Reviews is not connected to the period of award of Federal capitalization grants (i.e., Annual
   Reviews will continue even after Federal appropriations are no longer available).

   EPA will complete an Annual Review of the IUP and the Biennial Report covering the same fiscal year
   according to the schedule established in the grant agreement (generally within 60 days of receipt of
   the Biennial Report in the year it is due, and approximately the same date on the year the Biennial
   Report is not due). After reasonable notice by EPA, the State or loan recipient shall make available to
   the EPA such records as the EPA reasonably requires to review and determine State compliance with
   the requirements of section 1452 of the SDWA as amended in 1996. EPA may conduct on-site visits
   as needed to provide adequate programmatic review.  During years in which a State Biennial Report
   is not required, the Region will, to the extent practicable, obtain information necessary to conduct its
   Annual Review from  the DWSRF Information System.  If necessary, the Region will  request the State
   to clarify information  in the system  or provide additional information. Requests for such supplemental
   information shall be kept to a minimum necessary for conduct of the Annual Review.

   Upon completion of its Annual Review, the Region will prepare a Program  Evaluation Report (PER).
   The Region shall submit the draft PER to the State for review and comment prior to  preparing  the final
   PER.

   Identification and resolution of issues need not be limited to the Annual Review process. As the
   Region becomes aware of issues in DWSRF program operations, the Region shall consult with the
   State as appropriate. EPA will review the adequacy of State program management procedures and
   compliance with procedures as described in the State's capitalization grant application and Operating
   Agreement (if used).

   The following is a list of review topics which may be included as part of the Annual Review:

   Compliance/General Program Management

   •   Compliance with capitalization grant conditions and EPA grant regulations;
   •   Compliance with the State assurances incorporated in the capitalization grant agreement(s);
   •   Consistency of DWSRF program operations with the State's short and long term goals and
       objectives as reflected in the DWSRF capitalization grant application(s) and grant agreements;
   •   Coordination between the DWSRF program and other State drinking water program management
       activities (e.g., source water protection, wellhead protection, capacity development,  assistance to
       small systems);
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   •   Compliance with requirements of section 1452 (e.g., eligibility of recipients, types of projects, and
       types of financial assistance provided);
   •   Program administration costs; adequacy of staffing; and
   •   Adequacy of State in filing timely "UCC Financing Statements" to ensure security on loans to
       private systems.

   Pace of Program

   •   Status of binding commitments and progress in initiating and completing projects;
       Compliance with projections of Federal outlays and adequacy of efforts to manage outlays, both
       for the current year as well as the period covered by the Annual Review; and
   •   Size of uncommitted fund balance.

   Project Level Management

   •   Compliance with cross-cutting Federal authorities;
   •   Adequacy of State environmental review procedures (including consideration of mitigation,
       consultation with appropriate State and Federal environmental officials, and adequacy of project
       documentation);
   •   Adequacy of State procedures for reviewing assistance applicants' financial (financial capability
       and credit analysis), managerial and technical capabilities;
   •   Adequacy of State procedures to review proposed dedicated repayment sources and financial
       security demonstrations;
   •   Adequacy of loan agreements (e.g., inclusion of assistance terms; accounting, audit, and record
       keeping procedures; default management provisions; and compliance with applicable State and
       Federal requirements);
   •   Adequacy of on-going State oversight of the financial, managerial and technical capability of
       assistance recipients and appropriateness of State actions to resolve areas of concern.
   •   Consistency of assistance recipients with IUP (e.g., names of recipients, assistance amounts,
       terms of assistance); and
       Adequacy of construction management oversight (e.g., change orders, compliance with applicable
       labor laws, adherence to schedule, record keeping).

   Financial Management

   •   Adequacy of State financial  management system (including documentation relating to Federal
       cash draws, deposit of State matching funds, posting of repayments and interest earnings);
   •   Timeliness of flow of funds to assistance recipients;
   •   Adequacy of financial statement of the DWSRF program;
   •   Adequacy of fund balance to meet financial responsibilities (e.g., current operating expenses, debt
       service payments, funding of reserves, long-term financial assistance needs);
   •   Comparison of actual expenditures to budget;
   •   Adequacy of State internal controls to prevent waste, fraud and abuse (e.g., processing of
       payments, financial accounting);
   •   Adequacy of loan portfolio management (including billing and collections, aging of accounts,
       actions to prevent payment default);
   •    Repayment record, including defaults and potential for defaults;
   •   Mix and relative risk of financial assistance types (e.g.,  various interest rates, guarantees,
       refinancings, disadvantaged community assistance);
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   •   Adequacy and reasonableness of State fund investment practices;
   •   Appropriateness of State policies and strategies with respect to impacts on the long-term financial
       viability of the DWSRF program;
   •   Reasonableness of the disadvantaged community program and consistency of its implementation
       with the approved program; and
   •   Adequacy of the State's cash flow analysis, review of financial trends, and long term forecasting of
       project assistance needs.


   2. Evaluation

   The Administrator shall prepare an evaluation of the effectiveness of the DWSRF programs'
   operations through  FY 2003 (section 1452(r)).

   3. Compliance assurance

   The Administrator will develop guidelines necessary to assure effective program management and to
   prevent waste, fraud, and abuse (section 1452(g)(3)). The Agency will assist the State in achieving
   and maintaining compliance with program objectives and requirements. There may be cases,
   however, when technical support may be insufficient or where a State may be reluctant or unable to
   correct identified problems.  This section of the guidelines outlines procedures and potential actions
   which may be necessary in cases of non-compliance.

   if the annual review or audit reveals that the State has not complied with its capitalization grant
   agreement or other requirements under section 1452, or if the State does not manage the DWSRF
   program in a financially sound manner (e.g., allows consistent and substantial failures of loan
   repayments), the Agency may take action under the enforcement provisions of the general grant
   regulations at 40 CFR 31.43.

   Before taking such action the Agency will issue a notice of non-compliance with the capitalization
   grant agreement and prescribe appropriate corrective action. The State's corrective action must
   remedy the specific instance of non-compliance and adjust program management to avoid
   non-compliance in  the future.

    If within 60 days of receipt of the non-compliance notice, a State fails to take the necessary actions to
    obtain the results required by the EPA, or provide an acceptable plan to achieve the results required,
   the Agency may suspend payments to the DWSRF until the State has taken acceptable actions (40
    CFR 31.43(a)(3)).  Once the State has taken the corrective action deemed necessary and adequate
    by the Agency, the withheld payments shall be released and scheduled payments shall recommence.

    If the State fails to  take the necessary corrective action deemed adequate by the Agency within twelve
    months of receipt of the original notice, any suspended payments may be deobligated and reallotted
    to other States. All future payments may be withheld from a State (40 CFR 31.43 (a)(4)),  and
    reallotted, until such time that adequate corrective action is taken and the Administrator certifies that
    the State is back in compliance.
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   4.  Dispute resolution

   Any State applicant or recipient that has been adversely affected by an Agency action or omission
   may request a review of such action or omission. The procedures are codified in the Agency's
   general grant regulations at 40 CFR Part 31, Subpart F.
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VII. APPENDICES


    A.  Federal Cross-Cutters

Environmental Authorities

•   Archeological and Historic Preservation Act of 1974, Pub. L. 86-523, as amended

•   Clean Air Act, Pub. L. 84-159, as amended

•   Coastal Barrier Resources Act, Pub. L. 97-348

•   Coastal Zone Management Act, Pub. L. 92-583, as amended

•   Endangered Species Act, Pub. L. 93-205, as amended

•   Environmental Justice, Executive Order 12898

•   Fioodplain Management, Executive Order 11988 as amended by Executive Order 12148

•   Protection of Wetlands, Executive Order 11990

•   Farmland Protection Policy Act, Pub. L. 97-98

•   Fish and Wildlife Coordination Act, Pub. L. 85-624, as amended

•   National Historic Preservation Act of 1966, PL 89-665, as amended

•   Safe Drinking Water Act, Pub. L. 93-523, as amended

•   Wild and Scenic Rivers Act, Pub. L. 90-542, as amended


Economic and Miscellaneous Authorities

•   Demonstration Cities and Metropolitan Development Act of 1966, Pub. L. 89-754, as amended,
    Executive Order 12372

•   Procurement Prohibitions under Section 306 of the Clean Air Act and Section 508 of the Clean Water
    Act, including Executive Order 11738, Administration of the Clean Air Act and the Federal Water
    Pollution Control Act with Respect to Federal Contracts, Grants, or Loans

•   Uniform Relocation and Real Property Acquisition Policies Act, Pub. L. 91-646, as amended

•   Debarment and Suspension, Executive Order 12549
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Social Policy Authorities

•  Age Discrimination Act of 1975, Pub. L. 94-135

•  Title VI of the Civil Rights Act of 1964, Pub. L.88-3522

•  Section 13 of the Federal Water Pollution Control Act Amendments of 1972, Pub. L. 92-500 (the Clean
   Water Act)

•  Section 504 of the Rehabilitation Act of 1973, Pub. L. 93-112 (including Executive Orders 11914 and
   11250)

•  The Drug-Free Workplace Act of 1988, Pub. L. 100-690 (applies only to the capitalization grant
    recipient)

•  Equal Employment Opportunity, Executive Order 11246

•  Women's and Minority Business Enterprise, Executive Orders 11625,  12138 and 12432

•  Section 129 of the Small Business Administration Reauthorization and Amendment Act of 1988,
   Pub. L.  100-590

•  Anti-Lobbying Provisions (40 CFR Part 30)  [applies only to capitalization grant recipients]
       2The Civil Rights Act and related anti-discrimination statutes apply to all the operations of the
SRF program.

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   B.  Criteria for Evaluating a State's Proposed NEPA-like Process

   The following criteria will be used by the RA to evaluate a proposed SERF:

   A)  Legal foundation. Adequate documentation of the legal authority, including legislation, regulations
       or executive orders and/or Attorney General certification that authority exists.

   B)  Interdisciplinary approach. The availability of expertise, either in-house or otherwise, accessible
       to the State Agency.

   C)  Decision documentation.  A description of a documentation process adequate to explain the basis
       for decisions to the public.

   D)  Public notice and participation.

       1)  A description of the process, including routes of publication (e.g., local newspapers and
           project mailing list), and use of established State legal notification systems for notices of
           intent, and criteria for determining whether a public hearing is required.

       2)  The adequacy of a rationale where the comment period differs from that under NEPA and is
           inconsistent with other State review periods.

   E)  Consider alternatives. The extent to which the SERF will adequately consider:

       1)  designation of a study area comparable to the final system;

       2)  a range of feasible alternatives, including the no action alternative;

       3)  direct and indirect impacts;

       4)  present and future conditions;

       5)  land use and other social parameters including recreation and open-space considerations;

       6)  consistency with population projections used to develop State implementation plans under the
           Clean Air Act;

       7)  cumulative impacts including anticipated  community growth (residential, commercial,
           institutional and industrial) within the project study area; and

       8)  other anticipated public works projects including coordination with such projects.
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C. Definitions

Administrative Expenses - Costs incurred in managing and operating the SRF program. A State may
use up to 4% of its allotment for program administration expenses.

Annual Review - EPA's assessment of the success of a State DWSRF program.

Appropriations - Statutory authority that, after apportionment by OMB, allows Federal agencies to
obligate funds and make payments from the Treasury for specified purposes.

Assurances - Certifications or pledges by the State that it will meet the requirements of the SDWA and
other requirements of the program.

Automated Clearing House - A Federal payment mechanism that transfers cash to States and other
recipients of Federal assistance using electronic transfers from the Treasury through the Federal Reserve
System.

Biennial  Report - The State's SRF Report to EPA which contains information on how the State has met
the goals and objectives of the previous two fiscal years as stated in the Intended  Use Plan and grant
agreement.

Bank/Banking - Crediting amounts (contributed by the State to SRF eligible projects or activities) to the
SRF in excess of amounts required towards meeting certain requirements of future capitalization grants.

Binding Commitment - A legal obligation by the State to a local recipient that defines the terms and the
timing for assistance under the SRF.

Capitalization Grant - The assistance agreement by which EPA obligates to award funds allotted to a
State for purposes of capitalizing that State's revolving fund and funds for other purposes authorized in
section 1452.

Capitalization Grant Application - An application for Federal assistance submitted by a State, which in
addition to the application form includes an Intended Use Plan, proposed payment schedule, and
operating agreement or other documents describing how the State intends to operate its SRF.

Certification/Certify - Documentation signed by the responsible party that specific requirements or
standards have been or will be met.

Community Water System - A public water system that: (a) serves at least 15 service connections used
by year-round residents of the area served by the system; or (b) regularly serves at least 25 year-round
residents.

Cross-cutting Authorities - Federal laws and authorities that apply by their own terms to projects or
activities  receiving Federal assistance.

Debt Obligation - A legal obligation or liability to pay something to someone else.

Default - Failure to meet a financial obligation such as a loan payment.
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Disadvantaged Community - The service area of a public'water system that meets affordability criteria
established after public review and comment by the State in which the public water system is located.

Disbursement - The transfer of cash from the SRF to the assistance recipient.

Disbursement Schedule - A quarterly schedule of estimated disbursements from the SRF.

Eligible System - Community water systems, both privately or publicly owned, and nonprofit
noncommunity water systems.

Environmental Review - An environmental review process conducted by States that complies with 40
CFR Part6, Subpart E or an alternative "NEPA-like" State environmental review.

Equivalency Projects - Projects that must total the amount equal to the Federal capitalization grants and
must comply with environmental review requirements and Federal cross-cutting authorities.

Financial Health/Integrity - The ability of the DWSRF to address SDWA needs and to be continually
available to meet future needs.

Guarantee - A promise to provide municipal bondholders with full and timely payment of principal and
interest on the municipal  debt obligation to the limit of the guarantee, in the event of default by the
municipality.

Intended Use Plan -A document prepared each year by the State, which identifies the intended uses of
the funds in the SRF and describes how those uses support the goals of the SRF.

Leveraging - The use of the capitalization grant as the security for the sale of State bonds. Leveraging
does not include State financing arrangements in which repayment streams, rather than capitalization
grant or ACH are used as the primary security for the bond issue.

Loan -An agreement between the DWSRF and the local recipient through which the SRF provides funds
for eligible assistance and the recipient promises to repay the principle sum back to the SRF over a period
not to exceed 20 years, except for disadvantaged communities that may receive a loan for up to 30 years
(that does not exceed the life of the project), at an interest rate established at or below market interest
rates (may be interest free).

Net Bond Proceeds - The funds raised from the sale of the bonds minus issuance costs (e.g., the
underwriting discount, underwriter's legal counsel fees, bond counsel fee, financial advisor fee, rating
agency fees, printing of disclosure documents/bond certificates, trustee banks' fees, various forms of
credit enhancement and  other costs that may be incurred by a State agency incidental to the bond
issuance).

Noncommunity Water System - A public water system that is not a community system.

Noncompliance - Failure to satisfy the terms of the capitalization grant agreement, including unmet
assurances, invalid certifications, or failure to manage the DWSRF in a financially sound manner.

Nonprimacy States - States that do not exercise primary enforcement responsibility for public water
systems.
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Operating Agreement - An optional document in which the State may establish the basic framework and
procedures of the DWSRF that are not expected to change annually.

Payment/Payment Schedule - A payment is an action by EPA to increase the amount of funds available
for cash draw in the Automated Clearing House. A payment is not a transfer of cash to the State, but only
an authorization making funds available for transfer to the State when a cash draw request is submitted.
A payment schedule, indicating the timing and size of the payments to be made, will be agreed upon by
EPA and the State based on the State's projection of binding commitments.

Refinancing - Purchase of a previously executed debt obligation where initial debt was  incurred and
construction initiated after July 1,1993.

Set-Aside - Use of allotted State funds for a range of specific SDWA related activities identified in Section
1452, to encourage source water protection and other State drinking water program activities.

State Match - Funds equaling at least 20% of the amount of the capitalization grants which the State must
deposit into the Fund. The State must also provide a 10%  match if the State uses the 1452(g)(2) set-
aside.
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