MBV
          United States
          Environmental Protection
          Agency
            Office of Water
            Washington, DC 20460
EPA-832-B98-003
September 1998
Guide to Using EPA's
Automated Clearing House
for the Drinking Water State
Revolving  Fund Program

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                                         CONTE
                                             Contents
I. Introduction 	2
    The Purpose of this Guidebook	2
    The EPA Automated Clearing House 	2
    How the Funding Process Works	2
    Why the ACH is Being Used for the DWSRF Program	4
    DWSRF Program Differs From CWSRF Program	4
    Important Definitions	5

II. Overview of the DWSRF Program ACH Process	6
    How the Funds Flow 	6
    General Procedures for DWSRF Program ACH Operations	6
    Timing of Payments and Cash Draws 	8
    Cash Draw Ratio for Set-Asides 	9
    Federal and State Cash Draw Proportionality	9
    Grant Specific Proportionality	9
    Delayed Match	10
    Rolling Average Proportionality	10
    State Overmatch	11
    Leveraging	11
    Transfers Between the DWSRF Program and the CWSRF Program  	11
    Transfers Between the Fund Account and the Set-Aside Account	13
    Cash Draws for Privately-Owned Systems	14

III. Cash Draw Procedures	15
    ACH Process  for Set-Asides	15
         Administration and Technical Assistance	15
         State Program Management	15
         Technical Assistance to Small Systems	16
         Assistance to State Programs	16
    ACH Process  for Fund Activities	17
    Loans	19
         Payment and Cash Draw Rules 	19
    Buy or Refinance Existing Debt Obligations	20
         Payment Rules	20
         Cash Draw Rules	20
         Projects or Portions of Projects Not Constructed 	21
         Incremental Disbursement Bonds 	21
    Purchase of Insurance 	22
         Payment Rules	22
         Cash Draw Rules	22
    Guarantees	22
         Payment Rules	22
         Cash Draw Rules	22
    Revenue or Security for Fund Debt Obligations 	25
         Payment Rules	26
         Cash Draw Rules	26
         Aggressive Leveraging	27
         Cash Draw Option for Combined Direct Loan/Leveraged Programs	28
Appendix A: Glossary of Terminology	29

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                                     1
                                             R  O  D  U  C
I.   Introduction
The  Purpose of this  Guidebook
The passage of the Safe Drinking Water Act (SDWA)
Amendments of 1996 (Pub. L.  104-182) signaled the beginning
of a national commitment to protect public health by providing
low-cost funding assistance for public drinking water infrastruc-
ture. Section 1452 of SDWA establishes a Drinking Water State
Revolving Fund (DWSRF) Program and authorizes $9.6 Billion
in capitalization funding through 2003.

SDWA authorizes the Administrator of the U.S. Environmental
Protection Agency (EPA) to award capitalization grants to
states for use in each state's DWSRF Program. In February
1997, EPA published the DWSRF Program Guidelines (EPA
816-R-97-005) that establish the framework for the DWSRF
Program and the capitalization grant award process.

This Guidebook is designed to supplement EPAs DWSRF
Program Guidelines by explaining in more detail the process
states will use to access grant funds through EPA's  Automated
Clearing House (ACH) system.  The following  questions will be
addressed:
•  What is the EPA ACH?
•  How does the ACH work?
•  Why is the ACH being used for the DWSRF Program?
•  How will a state draw cash from the ACH?

Because a number of terms  and phrases have a specific
meaning when applied to the ACH process, they are highlight-
ed in the Guidebook  and defined in the appendix.

The  ERA Automated
Clearing House
The Automated Clearing House is a federal funds transfer sys-
tem used by all federal agencies, including EPA, to  electroni-
cally deposit funds into a grant recipient's bank account. The
system was initiated  in the early 1990s to replace the U.S.
Department of the Treasury's Financial Communication System
- Letter of Credit.
The ACH system continues the federal process that has been
in use since the  1960s enabling recipients of federal grants and
contracts to draw down cash as needed, based on incurred
costs. The federal system to transfer funds has been improved
along the way.  In 1979, the system was converted to an elec-
tronic payment mechanism that linked the federal treasury, the
federal reserve and the federal agencies into one network.
Through this mechanism, then referred to as the "letter of
credit," recipients of federal funds obtained cash from the trea-
sury. The ACH system replaced the letter of credit system,
but uses the same basic cash DISBURSEMENT process.

The objectives of the ACH are the same as they were for the
previous system:
• Ensure efficient federal cash management
• Expedite  cash transfers to assistance recipients
• Provide timely and accurate reporting on ACH  transactions.

The ACH system is currently in use in the Clean Water State
Revolving Fund Program (CWSRF).  In Fiscal Year 1996 alone,
the ACH processed more than $1.5 billion in CWSRF CASH
DRAW requests  from states.  Since the beginning of the
CWSRF program, the ACH system,  and previously, the federal
letter of credit system, have transferred more than $8.8 billion
in federal funds to states for eligible assistance activities.

How the Funding Process Works
As shown in Figure 1, the process  of transferring federal funds
to the DWSRF Program actually began when Congress passed
the 1996 Amendments to the Safe Drinking Water Act and
authorized funding for the Program. Congress annually appro-
priates funds for the DWSRF Program, as it does for all of the
federal government.  The APPROPRIATION for federal fiscal
year  1997, the first year of the DWSRF Program funding, was
$1.275 billion. Congress appropriated $725  million in fiscal
year  1998 and has authorized an additional $1.0  billion per
year though fiscal year 2003.

Once the funds have  been appropriated, the Office of
Management and Budget (OMB) apportions budgeted funds to
EPA, including the DWSRF Program capitalization funds. EPA

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                                       INTRODUCTION
                                                                                                DWSRF
                                                                                                Program
                                                                                              Draws Funds
                                                                                                 After
                                                                                               Payments
Figure 1. Transfer of Federal Funds to the  DWSRF Program
then calculates each state and federal territory's ALLOTMENT.
For fiscal year 1997 the allotments were made according to the
formula used for distributing Public Water System Supervision
grants to  states as established in SDWA.  Funds available from
fiscal year 1998 and beyond will be allotted according to the
most recent EPA Drinking Water Needs Survey.

Upon approval of the state's grant application, EPA obligates
the funds to  each state and Puerto Rico in the form of capital-
ization grants.  The District of Columbia and the federal territo-
ries receive direct grants for eligible activities.

After awarding a capitalization grant, EPA reserves funds in
the federal treasury based upon a PAYMENT schedule devel-
oped by  the  state. As costs are incurred, cash can then be
drawn  by states and territories through the ACH process to
the state's bank. During this process, EPA only reviews the
request for account accuracy and to verify that the balance of
funds available is sufficient.
As DWSRF Program ASSISTANCE RECIPIENTS incur costs
under the DWSRF Program, they submit a request to the state
for a cash DISBURSEMENT. The state submits a request to
EPA for a cash draw through the ACH to cover the federal
share of the incurred costs.  The state then disburses cash to
the  assistance recipient.  When the DWSRF Program incurs
costs directly, for example, to pay eligible administrative costs,
the  state submits a similar cash draw request to EPA.

Using the ACH system, EPA submits the request to the federal
treasury.  No later than the next business day, the federal trea-
sury will deposit the requested amount in the DWSRF
Program account within the state's bank.  This quick response
is possible because cash draw approvals are subject only to
account and signature verification and because the balance of
undrawn payments in the ACH is accessible  for draw-down at
the  time of the request. EPA does not review the programmat-
ic validity of the request at this time.  At a later date when an
annual review is performed, the state will be  called upon to

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                                      1
                                              R  O  D  U  C
demonstrate that cash draws were made in accordance with
the cash draw rules outlined in this Guidebook and are support-
ed by appropriate documentation and accounting procedures.

Why the ACH  is  Being Used
for the  DWSRF Program
Through experience with the CWSRF program, EPA recognizes
that from the time funds are allotted to the states for the DWSRF
program,  it may take several years for the funds to be expend-
ed. First, states have up to two years after federal funds are
allotted to apply for and receive grant awards. Second,  states
establish  a schedule to receive grant payments depending on
a state's expectations for committing the funds to loans and
other assistance. Third, states then have up to one year from
the time of each grant payment to enter into BINDING COM-
MITMENTS (e.g., loan agreements) with loan recipients for pro-
jects identified in the state's Intended Use Plan.  Fourth,  many
projects have multiyear construction schedules so funds are
expended over a period of time.  By using the ACH system for
the DWSRF program,  EPA will ensure that:
•  federal cash outlays are managed efficiently - federal  funds
   will be used only when needed to cover eligible costs
•  cash disbursements are made quickly to respond to the
   cash needs of the states and local public water systems

The ACH payment mechanism is tested, proven, and well
understood.  EPA will make payments through the ACH  sys-
tem based on a schedule negotiated between EPA and the
state. EPA will make cash available, as costs are incurred, no
later than the next business day following a cash request.
This will reduce the impact on the federal budget while ensur-
ing that cash will be provided immediately when requested.

DWSRF  Program Differs
From CWSRF Program
While the DWSRF Program is very similar to the CWSRF
Program,  significant differences require new or modified cash
draw procedures. Under SDWA, states may "set  aside" up to
31 percent of the federal capitalization funds for activities such
as small system technical assistance, state program manage-
ment support, and source water protection. In this report, the
DWSRF Program refers to activities funded through both the
Set-Aside Account and the Fund. The DWSRF Program
Guidelines require that set-aside funds be maintained in sepa-
rate accounts (i.e., Set-Aside Account) from the funds used for
loans and other types of capital project assistance (i.e., the
Fund). As will be discussed later in this guidebook, the ACH
cash draw procedures differ for "set-aside" funds and for loans
and other types of Fund assistance.  Figure 2 displays the
DWSRF program structure.
 Figure 2.  DWSRF Program Structure

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                                      INTRODUCTION
Important  Definitions

To understand how the ACH will work with the DWSRF
Program, several key terms must be understood.

• Capitalization Grant Payments
A payment is an action by EPA to increase the amount of funds
available for cash draw through the ACH (i.e., the ceiling).  Through
payments, the EPA makes funds available to the state for cash
draw up to the amount of the capitalization grant. 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, is required as part
of the grant agreement between EPA and the state.

• Binding Commitments
Binding commitments are legal agreements between the state
and the local public water system that define the terms for
assistance under the DWSRF.  Binding commitments must be
made in an amount equal to the amount of each grant pay-
ment and associated state match designated for the Fund
within one year after the receipt of each grant payment.

• Cash Draw
A cash draw is the transfer of cash from EPA through the ACH
to the state DWSRF Program.  Upon a state request for a cash
draw,  the Treasury will transfer funds to the DWSRF account
established in the state's bank through the ACH. The assis-
tance  recipient must first incur a cost, but not necessarily dis-
burse funds for that cost, in order for cash to be drawn.

• Disbursements
A disbursement is the transfer of cash from the DWSRF
Program to the assistance recipient or others. Annually, the
state provides EPA with a schedule of estimated disburse-
ments for the upcoming fiscal year, regardless of whether the
state submits a capitalization grant application.

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                                        O  V E  R V
                                                       E W
II.  Overview  of the
      DWSRF  Program
      ACH  Process
How the Funds  Flow
After a state has obtained its grant and selected a bank in
which to establish the ACH, it is ready to capitalize its DWSRF
Program and provide various forms of financial assistance to
public water systems.  Based on a negotiated payment sched-
ule, EPA makes payments which increase the amount of capi-
talization grant funds available for cash draw through the ACH.
Except for grants made with fiscal year 1997 appropriations1, at
the time of a federal payment the state shall provide its match
                               &EFA
  State Government
Figure 3. EPA Payments and State Match:
(1) EPA makes payments to the DWSRF. (2) At the time
of federal payment, the state provides matching funds.
either in cash or through a payment similar in form to the one
made by EPA (Figure 3).  At the time of each cash draw from
the ACH for the Fund, the state shall provide its cash match.
Set-asides are drawn only from the federal ACH, not from
matching funds.

Figure 4 illustrates the cash flow into and out of the DWSRF
Program using the ACH. It is important to note that cash will
be provided through the ACH to the DWSRF Program no later
than the next business day after EPA receives a valid request.
Cash draws are virtually automatic, since they are subject only
to account and signature verification and a review of the bal-
ance of funds accessible for draw down through the ACH at
the time of the request.

General Procedures  for  DWSRF
Program  ACH Operations
EPA has developed  specific procedures for ACH operations as
they apply to the DWSRF Program. These procedures were
developed to ensure that the requirements of the DWSRF Pro-
gram will be met.  They are based on the following principles:
• All payments will be made either 8 quarters after the capital-
  ization grant is  awarded or 12 quarters after funds are allot-
  ted to the state, whichever is earlier (Fund and Set-Aside
  Accounts)
• Binding commitments must be entered into no later than
  one year after a payment is received for funds designated
  for the Fund
• Cash draws from  the Fund will not be permitted for a particu-
  lar project until  a state has entered into a binding commit-
  ment for that project
• When cash is needed to pay for construction related costs,
  the ACH can be converted to cash as quickly as those con-
  struction costs  are incurred
• Cash will be available only up to the level of payments made
• Each form of assistance, such as loans or insurance, has its
  own set of cash draw rules that reflect the cash flow for the
  assistance option.
• Cash draws for set-asides will be based on cost incurred
  under approved workplans.
'SDWA allows states to delay providing the state match for fiscal year 1997
funding until September 30, 1999.

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                                             E R V I  E W
          Local
State
Federal
                                                                                   &EFA
                        Request for
                        Disbursement
    Assistance Recipient
                                                State's Bank
                                                                                     U.S.Treasury
Figure 4. Flow of Cash Through the DWSRF Program: (1) A contractor or vendor submits an invoice for
incurred costs to the recipient of the DWSRF loan. (2) Assistance recipient requests a disbursement from the
DWSRF for these costs.  (3) DWSRF requests EPA approval for a cash draw from the ACH.  (4) EPA verifies request
for a cash draw, and forwards it to the U.S.Treasury. (5) Treasury wires the cash  draw to state's bank. (6a) State's
bank places the funds in the DWSRF account, and (6b) at the same time, state government must provide state
match in cash to the DWSRF  (although state may have done so earlier, at the time of payment). (7)  DWSRF then
disburses the funds to DWSRF loan  recipient. (8) Cycle of the ACH process is complete when assistance recipient
pays invoice from its contractor or vendor.

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                                             O  V  E  R V
                                                             E  W
The following section describes the general procedures that
apply to all forms of assistance.


Timing of Payments and Cash Draws
All the payments to the state will be made by the earlier of:
• 8 quarters after the capitalization grant is awarded, or
•  12  quarters after the  funds are allotted to the state.  The
  allotment date is the  date funds are made available to the
  states by EPA.

A state must apply for and be awarded the capitalization grant
either during the fiscal year the funds are allotted or the next
fiscal  year.  After the grant is awarded, EPA will make pay-
ments over a maximum of eight quarters from the grant
award, but the number  of quarters may be less depending on
          the date of the grant award.  For example, if a state receives a
          grant award at the end of the second year of eligibility, there
          will only be four quarters remaining to receive the payments.
          As a matter of policy, once a payment is made, EPA will not
          withdraw that payment.

          Consider the examples using the time line in  Figure 5  to
          understand how the number of quarters will be calculated
          for payments.

          The payment schedule, negotiated between EPA and the state,
          is largely dependent on the state's projected rate of entering
          into binding commitments and expending set-aside  funds.
          EPA will increase the amount of funds available for  cash draw
          through the ACH according to the schedule of payments
                                      10/97   1/98
                                        1/00
             10/00
   Example 1. Funds are allotted to
   a state in October 1997. In
   January 1998, the state is awarded
   a capitalization grant.  Payments
   will be made over a  period not
   longer than eight quarters before
   January 2000 (i.e., eight quarters
   after the capitalization grant is
   awarded).
     Example 2.  Funds are allot-
     ted to a state in October
     1997.  In September 1999(at
     the end of the two-year peri-
     od of availability), the state is
     awarded a capitalization grant.
     Payments will be made over  a
     maximum of four quarters
     (i.e., within twelve quarters
     after the funds are allotted).
PAYMENTS OVER  8 QUARTERS
>* (o
rc u


~ 2
O "I
                                                                                                 10    11
                                                                  Qua
                                                                             t  e
                                      10/97
                                                                                    9/99
                                                                                                            12
                                                        10/00
                                        PAYMENTS
                                            OVER
                                       4 QUARTERS
                                                                                                               a
                                                                                                               Ql1

                                                                 456789

                                                                  Quarters
                                                                                                 10    11
                                                                                                            12
Figure 5.Timing of Payments

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                                                    E  R V I  E  W
contained in the grant agreement negotiated with the state. At
the time of a federal payment, the state shall provide its match
either in cash or through a payment to its own letter of credit
or similar financial arrangement.  At the time of each cash
draw from the ACH for Fund activities, the state shall provide
its cash match.

Cash Draw Ratio  for Set-Asides
SDWA requires that state match be deposited only into the
Fund for projects. Consequently,  the DWSRF Program
Guidelines  allow states to draw down federal funds for set-
aside use without the need to provide a state match in the
form of cash into the Fund. As a result, states will use only
federal capitalization  grant funds for set-aside activities.  (Note:
There is a separate one-to-one match for the state program
management set-aside that is separate from and in addition to
the 20  percent matching contribution required for the federal
capitalization grant.)

Federal and State  Cash Draw
Proportionality
The DWSRF Program assistance recipient must first incur a
cost, but not necessarily disburse funds for that cost, in order
for cash to be drawn through the ACH.  When costs are
incurred and a bill is  submitted to EPA,  states may draw feder-
al cash from the ACH in proportion to total funds to be
deposited in the Fund. To calculate the correct cash draw
ratio, states will need to determine what amount of funds will
be used for:
•  Set-aside activities - the  capitalization grant dollars available
   for Fund activities  will be affected by the level of set-aside
   funding (up to 31 percent of the grant amount) planned  by
   the state.
•  State match - states must provide a minimum of 20 percent
   of the capitalization grant, but may wish to provide addition-
   al state matching funds  to increase loan funds available.
   (Funds in addition  to the 20 percent match do not factor into
   the cash draw ratio.) The match is deposited only in the
   Fund Account.  State match will be drawn down as project
   activity proceeds and monies for incurred costs are drawn
   from the Fund account.  As a one-time exception, SDWA
   allows states to delay providing the match associated with
   fiscal year  1997 funding until September 30,  1999.
The basic ratios that reflect the federal and state proportionali-
ty for DWSRF programs are as follows:
Federal Ratio =
   Capitalization Grant Dollars Used for Fund Activities
          Total Dollars Used for Fund Activities
      Capitalization Grant - Set-Asides
Capitalization Grant - Set-Asides + State Match
  State Ratio =
                       State Match
             Total Dollars Used for Fund Activities
                         State Match
          Capitalization Grant - Set-Asides + State Match


The ratios above reflect a DWSRF Program that is not using a
LEVERAGING approach.  States that use leveraging will follow
a different computation to determine the proportional federal
and state cash draw ratios (Section III, page 25).

Grant-Specific Proportionality
States can choose between two options for determining propor-
tionality: 1) grant-specific cash draw proportionality or  2) rolling
average cash draw proportionality. Both use the same basic
formulas shown above, but have different time periods cov-
ered by the ratio.  The states will choose one option for calcu-
lating proportionality.

The example in Figure 6 demonstrates the computation of
grant-specific federal  and state proportionality ratios for non-
leveraged DWSRF Programs over  a three-year period (three
grant awards).

In each of these examples, different federal and state ratios
result due to differences in set-aside funding as a percent of
the capitalization grant. Funds drawn down to cover invoices
associated with each capitalization grant will be drawn accord-
ing to the ratio for that particular capitalization grant. A state
has the option to transfer funds from the Fund to the Set-Aside
Account as long as the payment has not yet been made.
States may transfer funds from the Set-Aside Account to the
Fund at any time. If a state undertakes a transfer, the state
would need to recalculate its proportional share ratios.

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                                             O V E  R  V
    Year   Cap     State    Set-Aside
          Grant   Match    Account
   Fund Account       Federal       State
 (A)     (B)     (C)    Portion of  Portion of
Fed.   State  Total  Cash Draws Cash Draws
1
2
3
$100
$105
$110
$20
$21
$22
$15
$10
$30
$85
$95
$80
$20
$21
$22
$105
$116
$102
81%
82%
78%
19%
18%
22%
Figure 6. Example of Grant-Specific Proportionality Calculation
Rolling Average Proportionality
As an alternative, states may track total undrawn funds
(undrawn capitalization grant and state match), and develop
federal and state proportionality ratios for all draws, regardless
of the grant they are coming from. This approach considers
what funds have yet to be drawn from all outstanding grants
at the time of a new grant award or at the time of a grant
amendment and determines federal and state ratios for cash
draw purposes. A state may propose, for EPA approval, other
multiperiod methodologies that result in a similar proportionality.

Figure 7 illustrates how rolling average  proportionality ratios are
developed for a state over a hypothetical three-year period.  In
the first period, a state receives a $100 million grant, provides
a state match of $20 million and plans to use set-asides equal
to $ 15 million.  Set-aside costs are covered by federal capital-
ization grant funds, so the federal cash draw ratio for set-asides
is 100 percent.  The federal share cash draw ratio for the Fund
in the first period is 81 percent and the state match draw ratio
is 19 percent.  At the beginning of the second period the state
would determine the amount of undrawn capitalization grant
funds and associated state match funds remaining from the
period 1 grant and combine these amounts with new period 2
funding to determine a new total of undrawn capitalization
grant and state match funds. This new total would be used to
determine the federal and state ratios for second period cash
draw requests.  All invoices in a given period are drawn
according to the ratio for that period, no matter what grant the
invoice is associated with.

In the example presented in Figure 7, combining the funds
remaining from the first period with a new grant award
                         (second year) would result in feder-
                         al and state ratios of 79% percent
                         and 21% percent in period 2,
                         respectively.  The second period
                         ratios would be used until a new
                         grant award occurs or a transfer
                         occurs that affects the balance
                         between the state and federal
                         share of dollars being used for
                         Fund activities.  (See "Transfers
                         Between the DWSRF Program and
the CWSRF Program," and "Transfers Between the Fund
Account and the Set-Aside Account," pages 11-13.)  For exam-
ple, if the state determines that fewer  dollars are needed for
set-asides the state could transfer funds from the Set-Aside
Account to the Fund Account.  Because this modifies the
amount of funding for Fund activities,  new  federal and state
proportionality ratios would need to be developed.

Delayed IVIatch
If a state defers deposit of its 1997 matching funds, it must
agree to provide the match by September 30, 1999. Through
that date, federal cash draws for projects funded with the state's
fiscal year 1997 capitalization grant would cover the total
amount of incurred project costs.  For federal cash draws made
through September 30, 1999, a state must provide a cash
deposit into the Fund by that date to comply with proportionali-
ty requirements.  The cash deposit by  the state must be dis-
bursed prior to accessing  the federal ACH for additional cash
draws for Fund projects after September 30,  1999.  Set-aside
programs will not be affected by a loss of access to the feder-
al funds for project disbursements; they will continue to
access the ACH for incurred costs. For example, assume a
state that is awarded a $ 100 million capitalization grant is delay-
ing the state match.  The state draws $50 million of the grant by
September 30, 1999.  The state would be required to deposit
and disburse the $10 million match associated with the $50 mil-
lion prior to accessing the  ACH for additional cash draws for
Fund projects.  Invoices for eligible costs would be paid from
the $ 10 million state match until it is fully disbursed. Once the
$10 million is disbursed and proportionality is achieved, the
state would then use the  federal and state proportionality
ratios that result from the  formulas provided in the  "Federal
and State Cash Draw Proportionality" section above (page 9).

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                                                   E R V  I  E  W
 Action
 Cap    State   Set-Aside
Grant  Match  Account
  Fund Account    Federal       State
 (A)   (B)    (C)   Portion of    Portion of
Fed. State  Total  Cash Draws Cash Draws
Period 1
Beginning
Grant Award
Cash Draws
Ending Balance
Period 2
Beginning
Grant Award
Total
Cash Draws
Ending Balance
Period 3
Beginning
Grant Award
Total
Cash Draws
Ending Balance


$100




$105





$110





$20




$21





$22





$15




$30





$30





$85
($49)
$36

$36
$75
$111
($79)
$32

$32
$80
$112
($86)
$26


$20
($11)
$9

$9
$21
$30
($21)
$9

$9
$22
$31
($24)
$7


$105
($60)
$45

$45
$96
$141
($100)
$41

$41
$102
$143
($110)
$33


81%





79%





78%




19%





21%





22%


Figure 7. Example of Rolling Average Cash Draw Proportionality Calculation
If a state chooses to deposit all or a portion of its 1997
deferred state match before September 30, 1999, it must notify
EPA and amend its cash draw ratio to include the  1997 match.
The state will be required to expend the match associated with
cash draws made before the 1997 match was deposited before
accessing the ACH for additional cash draws for projects.

State Overmatch
Some states may choose to deposit more than the required 20
percent match into the DWSRF. This is referred to as state
overmatch. Even though the state is contributing more funding
in an overmatch situation, the proportional federal and state
cash draw ratio will not  change from that described above.

The federal proportional share may exceed that determined by
the proportionality calculation when a state is given credit for
its match amount as a result of funding activities in prior years
(but after July 1,  1993) or for banking excess match in the
                              DWSRF in prior years and
                              disbursing these amounts
                              prior to drawing cash.  If the
                              entire amount of the state's
                              required match has been dis-
                              bursed in advance, the feder-
                              al proportional share would
                              be 100 percent.

                              Leveraging
                              Where capitalization grants
                              are used to provide an
                              increased  amount of assis-
                              tance through the use of
                              leveraging, special  propor-
                              tionality rules apply. In
                              these cases the federal pro-
                              portionate share is  based on
                              the ratio of the federal grant
                              used as security to the total
                              amount secured. Examples
                              of this calculation are con-
                              tained in the leveraging sec-
                              tion (page 25). This concept
of proportionality was developed to ensure that the state and
EPA deposited the required share at the proper time and in
the  proper amounts.

Transfers Between  the DWSRF Program
and the CWSRF Program
A state may transfer funds between its DWSRF Program and its
CWSRF Program (SDWA, section 302).  If a state decides to do
so, the state may have to calculate new federal and state ratios
for its SRF programs.
• If repayments or interest are transferred, the proportionality
  ratios are unaffected.
• If capitalization grant funds are transferred from the CWSRF
  to the Drinking Water Set-Aside Account, or vice-versa, the
  CWSRF Program proportionality  ratios change, but the
  DWSRF Program ratios do not.
• If capitalization grant funds or state match are transferred
  from the CWSRF to the Drinking Water Fund or vice-versa,
  both CWSRF and DWSRF proportionality ratios change.

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                                                 O  V  E  R V
Proportionality ratios are recalculated according to the
following formulas2:
 Federal Ratio =
                                                  When capitalization grant funds or state match funds are trans-
                                                  ferred from one SRF project fund to another, the state must
                                                  enter into binding commitments for the newly transferred
                                                  funds.  This does not apply to funds transferred to the DWSRF
                                                  set-asides account.
      (Capitalization Grant Dollars for Fund ± Federal Dollars Transferred) - Federal Cash Draws

              (Total Dollars Used for Fund ± Total Dollars Transferred) -Total Cash Draws

            (Capitalization Grant - Set-Asides ± Federal Dollars Transferred) - Federal Cash Draws

  (Capitalization Grant - Set-Asides + State Match ± Total Dollars Transferred) - (Federal + State Cash Draws)


                       (State Match ± State Dollars Transferred) - State Cash Draws

            (Total Dollars Used for Fund  ± Total Dollars Transferred) -Total Cash Draws

                     (State Match ± State Dollars Transferred) - State Cash Draws

(Capitalization Grant - Set-Asides + State Match ± Total Dollars Transferred) - (Federal + State Cash Draws)
2These post-transfer proportionality ratios are applicable to the Drinking Water Fund. Proportionality ratios for the CWSRF can be calculated using the same formu-
las, with the CWSRF replacing the Drinking Water Fund.
  State Ratio =
   Example 1  -A DWSRF accepts a  $100 million capitalization grant and provides a $20 million state match. The
   state plans to use $15 million for set-asides.  Before the state makes any cash draws, it transfers its $20 million
   in state  match to the CWSRF program. At the same time, the CWSRF transfers $20 million  in capitalization
   grant funds to the  DWSRF program. The federal ratio for the DWSRF is 100%.

   DWSRF Federal Ratio

                       (Capitalization Grant - Set-Asides ± Federal Dollars Transferred) - Federal Cash Draws
            = (Capitalization Grant - Set-Asides + State Match + Total Dollars Transferred) - (Federal +  State Cash Draws)


   DWSRF federal  ratio after transfer of state match to CWSRF


            =   	($100 million - $15 million +  $0)  -  $0	
                ($100 million  - $15 million + $20 million - $20 million ± $0) - ($0 + $0)

            = 100%

   DWSRF federal  ratio after transfer of capitalization grant  funds from CWSRF


                 	($100  million - $15  million + $20 million) - $0	
                 ($100 million - $15 million + $20 million - $20 million + $20 million) -  ($0 - $0)

            = 100%


   Example 2  - Again, a DWSRF accepts a $100 million capitalization grant and provides a $20 million state
   match. The state plans to  use $15  million for set-asides.  As shown in  Figure 6, the federal ratio is  81%.  The
   DWSRF draws  $30 million from the Fund for incurred project construction ($24.3 million federal:  $5.7 million
   state). The CWSRF then transfers  $20 million in capitalization grant funds to the DWSRF Fund Account.  The
   new federal ratio for the DWSRF is 85%.

   DWSRF Federal Ratio


               	($100 million - $15 million + $20  million)  - $24.3 million	
            = ($100 million -  $15  million + $20  million + $20 million) -  $24.3 million -  $5.7 million



            = 85%

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                                                      E R V  I  E  W
This guide does not consider the full spectrum of potential
transfer structures.  States should contact their EPA Regional
Coordinator to discuss unique proposals and receive approval.

Transfers Between  the Fund Account
and  the Set-Aside Account

A state may transfer funds between the Fund and the  Set-
Aside Account after the capitalization grant is awarded
                                                through an amendment to the grant agreement.  However,
                                                while unexpended set-aside funds may be transferred to the
                                                Fund at any time, funds from the Fund can only be transferred
                                                to the Set-Aside Account if the transfer is accomplished prior to
                                                receiving the federal grant payment for the funds the state wish-
                                                es to transfer. If a transfer occurs, the new federal and state
                                                cash draw ratios can be calculated at the time of the transfer
                                                using the following formulas:
Federal Ratio =
  State Ratio =
      (Capitalization Grant Dollars for Fund ± Federal Dollars Transferred) - Federal Cash Draws
             (Total Dollars Used for Fund ± Total Dollars Transferred) -Total Cash Draws

         (Capitalization Grant - Set-Asides ± Federal Dollars Transferred) - Federal Cash Draws
(Capitalization Grant - Set-Asides + State Match ± Total Dollars Transferred) - (Federal + State Cash Draws)

                      (State Match ± State Dollars Transferred) - State Cash Draws
                (Total Dollars Used for Fund ± Total  Dollars Transferred) -Total Cash Draws

                    (State Match ± State Dollars Transferred) - State Cash Draws
(Capitalization Grant - Set-Asides + State Match ± Total Dollars Transferred) - (Federal + State Cash Draws)
  A DWSRF accepts a $100 million capitalization grant and provides a  $20 million state match. The state initially
  plans to use $15 million for set-asides. As shown in Figure 6, the federal ratio is 81%. The  DWSRF draws $30
  million from the Fund  for incurred project construction costs ($24.3 million federal: $5.7 million state).  It then
  transfers $2.5 million from the Set-Aside Account to the Fund. The new federal ratio is  82%.

  Federal             (Capitalization Grant - Set-Asides ± Federal Dollars Transferred) - Federal  Cash Draws
  Ratio =   (Capitalization  Grant - Set-Asides + State Match ± Total  Dollars Transferred) - (Federal + State Cash Draws)

         =                       ($100 million - $15 million + $2.5 million)  - $24.3 million
                   ($100 million -  $15 million + $20 million-t- $2.5 million) - ($24.3 million + $5.7 million)

                82%

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                                            O V  E  R V
Cash  Draws for Privately-Owned Systems
Some states may be legally unable to use state funds for pri-
vately-owned systems.  If they choose to make DWSRF loans
to privately-owned systems, this would impact their ability to
meet proportionality.

Two options are provided for states to deal with limitations on
funding private entities with state funds.
• Option 1:  When state funds cannot be used for privately-
  owned systems.  EPA will allow the state to draw 100%
  Federal funds for invoices from private entities.  At the same
  time the federal funds are drawn to cover the invoice, the
  state must deposit its proportional match, in cash, into the
  Fund.  Every 18 months, the state must submit documenta-
  tion that it has met proportionality within the last 6 months of
  each  18-month period. If a state is unable to document that
  proportionality has been met during the last 6 months of
  each  18-month period, state match deposited into the Fund
  for the purpose of matching 100% federal cash draws for pri-
  vate systems must be expended before federal funds when
  invoices from public systems are submitted.
• Option 2: As noted on pages 11-13, states have the option
  of transferring funds  between the CWSRF and DWSRF. In
  order to avoid difficulties in funding privately-owned sys-
  tems, a state may transfer state match from the DWSRF to
  the CWSRF and federal funds from the CWSRF to the
  DWSRF. As a result, 100% federal funds would be available
  for projects in the DWSRF. Proportionality ratios would
  change in the CWSRF as a result of this transfer.

States must deposit delayed FY97 state match, in cash, into
the Fund by September 30, 1999. After that date, the state
may not access federal funds for projects until the delayed
state match has been expended and the state reaches propor-
tionality.  Cash draws for federal funds to cover invoices from
privately-owned systems are exempt from this requirement.
Cash draws for federal funds to cover invoices from publicly-
owned systems are not exempt.

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                                            ROCEDURES
        Procedures
Based on the general principles and rules presented in
Section II, EPA has established specific payment and cash
draw rules for set-asides and for Fund activities.

ACH  Process  for Set-Asides
Section 1452 of the SDWA authorizes states to provide fund-
ing for set-aside activities.  These activities include:
•  Administration and technical assistance (up to 4 percent of
   the state allotment)
•  State program management (up to 10 percent of the state
   allotment)
•  Technical assistance to  small systems (up to 2 percent of
   the state allotment)
•  Assistance to other programs and activities (up to 15 per-
   cent of the capitalization grant)

States must establish and  maintain an account for set-aside
funds that is separate from the DWSRF Fund account. The
DWSRF Program Guidelines require that,  before cash is drawn
through the federal ACH for set-asides, a state must provide
detailed workplans describing how the funds  will be expend-
ed and receive approval for these workplans. Once work-
plans are approved,  states may draw funds through the ACH
to fund set-aside activities.  The administration and technical
assistance set-aside  (4 percent of allotment) may not require a
workplan unless a state is providing technical or other eligible
assistance with the funding in addition to reimbursing the
state for DWSRF Program administrative costs.

States may request cash draws through the ACH for the full
amount of the incurred cost of eligible set-aside activities. In
the case of state payroll expenses,  states may draw funds in
advance to ensure funds are available to meet personnel
expenses. Funds should be drawn no sooner than necessary
to meet immediate disbursement needs for administrative
costs. For example, a state can make a cash draw for admin-
istration ten days in advance, if the state's financial manage-
ment system requires ten days to process a cash draw in
preparation for meeting payroll.

While the 20 percent match is based on the entire capitalization
grant, states are not required to deposit the state  match at the
time that federal funds are drawn for set-aside activities. The
state match must be deposited into the state's DWSRF Fund
account by the time the state draws cash through the ACH for
Fund activities. The  federal and state cash draw  ratios present-
ed in Section II of this Guidebook reflect this approach.

Specific requirements have been established for  individual set-
aside activities.  The general process used for accessing capi-
talization grants for set-aside uses through the ACH is dis-
played in Figure 8.

Administration and Technical Assistance
[1452(g)(2)J (up to 4 percent)
States may use up to four percent of the allotment for costs of
administering  the programs under SDWA section 1452 and
providing technical assistance.

State Program Management [1452(g)(2)J
(up to  tO percent)
States may use up to 10 percent of the allotment to manage
SDWA-related  activities including, for example, administering
the state PWSS program and developing and implementing
capacity development, operator certification and  source water
protection programs.  SDWA requires that  funds used under
this set-aside be equally matched with additional state fund-
ing. This one-to-one match is separate from and in addition to
the 20 percent matching contribution required under section
1452 for the federal capitalization grant.

The one-to-one match requirement does not affect the cash
draw procedure for this set-aside. After workplan approval,
states may draw federal funds to cover 100 percent of eligible
costs under this activity. However,  at the end of each year
states will need to document compliance with the one-to-one
match requirement.

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                                         PROCEDURE
  Payments
                                              DWSRF
                                                                    100% Federal
                                                                    Cash Draws
                         ©
                                                                                         Set-Aside Activities
    State
   Match
                                                                                  Loan
                                                                           Repayments
                                                                                           Administration
                                                                                           State Program
                                                                                            Management
                                   Technical
                                   Assistance
                                                                                            Assistance to
                                                                                           State Programs
                                                                     • Land acquisition
                                                                        • Source water
                                                                   protection measures
Figure 8. Cash Draw for Set-Aside Activities: (1)  EPA payments and state match are placed in DWSRF.  EPA
payments are made to both the Fund Account and the Set-Aside Account according to a payment schedule.  State
match is deposited  into the Fund Account only, and is deposited according to the pace of Fund activity. The timing
of state match deposits is not related  to set-aside activity. (2) DWSRF makes federal cash draws for 100% of
incurred costs for set-aside activities.  (3) If set-aside funds are used to provide loans as part of "Assistance to State
Programs," loan repayments may be deposited in either the Fund Account or in the account dedicated to 1452(k)(1)
activities.
Technical Assistance to Small Systems
[1452(g)(2)J (up to 2 percent)
States may use up to two percent of their allotment to provide
technical assistance to public water systems serving fewer than
10,000 people. After workplan approval, states may draw
funds through the federal ACH to cover 100 percent of costs
incurred for eligible activities.

Assistance to State Programs [1452(k)(1)]
(up to 15 percent)
States may use up to 15 percent of the capitalization grant for
assistance including:
• loans to acquire land or conservation easements
• loans to implement source water protection measures or to
  implement recommendations in source water petitions
• technical and financial assistance to systems for capacity
  development
• expenditures to delineate and assess source water protec-
  tion areas
• expenditures to establish and implement wellhead protec-
  tion programs

No one activity may receive more than 10 percent of the fund-
ing for this set-aside. After workplan approval, states may
draw funds through the federal ACH to cover  100 percent of
invoices submitted for eligible activities.

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                                          ROCEDURES
ACH Process for  Fund Activities
This guidebook provides details on the cash draw process for
the DWSRF Fund activities:
• Loans
• Buy or Refinance Existing Debt Obligations
• Guarantees
• Purchase of Insurance for Local Debt
• Revenue or Security for Fund Debt Obligations

These rules are summarized in Figure 9 (following page).

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                                            PROCEDURES
Figure 9: Summary of Payment and Cash Draw Rules
 General Rule
                            Payment
Starting no sooner than one year
before the state enters into binding
commitments
The sooner of 8 quarters from capital-
ization grant or 12 quarters from time
funds are allotted
                                        Cash Draw
 Proportionate federal share is equal to the federal portion
 of the Fund (capitalization grant minus set-asides) divided
 by the total amount in the Fund (capitalization grant -
 set-asides+state match). Note: Proportionate federal share
 is calculated differently for leveraged programs.
 Loans
Based on the state's schedule of
binding commitments
 Proportionate federal share of incurred construction costs
 Cash may be drawn for eligible incurred prebuilding costs
 once the loan is made
 Buy or Refinance
 of Local Debt
Only eligible projects for which con-
struction was initiated and debt
incurred after July 1,1993
Based on the state's schedule of
binding commitments
Constructed Projects:
• For eligible incurred prebuilding costs, cash may be drawn
 once the loan is made.
• Equal amounts spread over the maximum number of quar-
 ters up to the proportionate federal share
• Privately-owned public water systems not eligible
Non-constructed Portions of Projects:
• Same as loans - based on proportionate federal share of
 incurred costs
 Insurance
Based on the state's schedule of
binding commitments
  Proportionate federal share of premiums as they are due.
 Guarantees of Local Debt
Based on the state's schedule of bind-
ing commitments
Non-default condition:
• Draw based on the proportionate federal share of the actu-
 al incurred construction cost multiplied by the ratio  of the
 guarantee reserve to the amount guaranteed
Default condition:
• Immediate. Up to the portion of the federal capitalization
 grant dedicated to guarantee
 Revenue or security for
 Fund debt obligations
 (Leveraging)
Based on the state's schedule of
binding commitments
Non-default condition:
• All Projects - Proportionate federal share of actual incurred
 costs is calculated as the ratio of the federal debt service
 reserve to the total debt service reserve, multiplied by the
 ratio of the total debt service reserve to the net proceeds
 of local debt, or.
• Group of Projects - Proportionate federal share of actual
 incurred costs of identified group of projects with costs
 equal to federal and state portion of debt service reserve.
Default condition:
• Immediate, up to the portion of the federal capitalization
 grant dedicated to security
 Set-asides
Payment taken at state discretion.
consistent with approved set-aside
workplanfs)
  No cash draw may occur until detailed workplans are
  approved by EPA.  No match deposit required for set-
  asides - federal draws may cover 100 percent of
  incurred costs

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                                          ROCEDURES
Loans
The DWSRF Program provides public water systems with a
permanent source of funding for important SDWA compliance
and public health protection projects. Repayments must
begin within one year of project completion. Except in the
case of a disadvantaged community loan, recipients must
repay the loans over a maximum of twenty years after project
completion. Disadvantaged community loans may have
repayment terms  of up to 30 years.  Repayments from the
loans will then be recycled into future loans ensuring that the
DWSRF will work as a revolving fund into the future. Figure
10 illustrates the flow of loan funds into and out of the DWSRF
Program.  The state also has the flexibility to provide addition-
al loan subsidies (e.g., loan forgiveness) to those communities
that meet the state definition of a disadvantaged community.
The use of disadvantaged community assistance does not
impact how a state draws funds from the ACH  but may
reduce fund corpus.

Payment and Cash Draw Rules
The payments for loans will be based on the state's Schedule
        of Binding Commitments.  The schedule must demonstrate
        that the state expects to enter into binding commitments in an
        amount equal to the amount of each grant payment and asso-
        ciated match designated for the Fund within one year after
        receipt of each grant payment. A state can renegotiate a pay-
        ment schedule if it has reason to do so.

        The state may draw cash through the ACH when the DWSRF
        receives a request from a loan recipient, based on INCURRED
        COSTS, including prebuilding costs and building costs.  An
        incurred cost is  one that is due and payable or paid. Loan
        recipients do not have to pay the costs in advance.

        Prebuilding costs (such as planning and design), which are
        costs associated with the scope of the project being built, may
        be included in the loan agreement.  All project costs, including
        those previously incurred,  must have met the appropriate
        requirements of SDWA section 1452 to be eligible for loans.

        The state may draw cash through the ACH for the full amount
        of incurred prebuilding costs immediately upon entering into a
  State Government
                  State Match
                Capitalization
                    Grant
       Loan
Repayments
   vvEPA
                                                                                       Contractor or Vendor
                    Assistance
                     Recipient
Disbursements
                                        - ^^
                              Cash to
                              Pay Invoices
Figure 1O. DWSRF Loans: (1) EPA capitalization grant and state match are placed in DWSRF. (2.)  Funds are dis-
bursed by DWSRF to recipient of DWSRF loan.  (3) Assistance recipient uses these funds to pay invoices from con-
tractor or vendor. (4) Assistance recipient repays loan to DWSRF.

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                                          PROCEDURES
loan agreement and receipt of a due and payable, or paid,
disbursement request from the loan recipient.
  EXAMPLES
  Example 1 - From a $100 million capitalization
  grant, a state plans to use $15 million for set-aside
  activities leaving $85 million of federal funding plus
  a $20 million state match totaling $105  million for
  loans from the Fund. The federal share  of the loan
  funds is 81 percent ($85/$105). The state antici-
  pates entering into binding commitments with
  communities at the following rate:

     • First quarter, $15 million
     • Second quarter, $50 million
     • Third quarter, $40 million

  The state will provide its 20 percent match as cash
  at the same time the cash is drawn for fund pro-
  jects from the ACH (state is not delaying the fiscal
  year 1997 match).  An EPA payment schedule will
  be negotiated based on  81% of the estimated loans:

     • First quarter, $1 2.1  million
     • Second quarter, $40.5 million
     • Third quarter, $32.4 million

  Once binding commitments are entered into, cash
  draw requests will be processed as costs are
  incurred  under the loan agreements.

  Example 2 - Amended payment schedule - If this
  same state actually enters into $30 million in loans
  in the first quarter after grant award, the payment
  schedule will be amended to provide for $24.3  mil-
  lion instead of $12.1 million in the first  quarter.
  The second and third quarter schedules would  be
  modified to reflect the expected  binding commit-
  ments at that time.  Cash draws will still be based
  on actual incurred construction costs.
Buy or  Refinance  Existing
Debt Obligations
To encourage systems to proceed with construction using
their own financing before DWSRF assistance is available, the
DWSRF may be used to buy or refinance debt obligations of
municipal, intermunicipal, or interstate agencies.  The flow of
funds is shown in Figure 11.

Only projects for which construction was initiated and debt
incurred after July 1, 1993 may be refinanced or have their
debt purchased through the DWSRF. Refinancing is allowed
for municipal, intermunicipal, or interstate agencies. Private
systems are not eligible for refinancing under section 1452.
The intent of this provision is to allow projects to move for-
ward in advance of when Fund assistance is available by
offering the prospect of project refinancing at better financial
terms at a later date. Projects refinanced must be eligible
under the DWSRF Program Guidelines. Where the original
debt for a project was in the form of a multipurpose bond
incurred for purposes in addition to eligible purposes under
section 1452, a Fund may provide refinancing only for the eli-
gible portion of debt, not for the entire debt. For the purpose
of refinancing, local debt is interpreted to mean a legally bind-
ing financial agreement entered into by a municipal, intermu-
nicipal, or interstate agency that requires repayment.

Payment Rules
Payments will be based on a state's schedule of binding com-
mitments, following the same rules as the loan program.
Loans  for refinanced projects must be repaid within 20 years
of the date the system and DWSRF enter into a binding com-
mitment for the project, or 30 years in the case of disadvan-
taged communities.

Cash Draw Rules
For constructed projects,  or the completed  portion of a pro-
ject, the rate of cash draw cannot be greater than equal
amounts over the maximum number of quarters that pay-
ments  can be made. For example, if a state receives its fiscal
year 1998 grant award (allotted in October 1997) in
September  1999, payments will be taken over four quarters to
comply with these requirements (see example 2, page 8).
Refinanced project cash draws would occur in equal amounts
over four quarters.

The state also has the option to immediately draw cash for up
to five  percent of each capitalization grant or two million dol-
lars, whichever is greater, to refinance or purchase local debt.
Cash draws may be made when a state can immediately
apply the funds to a refinanced project.  Also, for eligible pre-
building costs, cash for the full  amount can be drawn through
the ACH immediately as noted  under the loan cash draw
rules.  The cash  draw can be made up to the portion of the
federal capitalization grant dedicated to the refinancing and
purchase of local debt.

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                                        ROCEDURES
    State Government
       OLoan
Repayments
                                                                                     Holder of
                                                                                    Debt to be
                                                                                    Refinanced
                  State Match    
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                                         PROCEDURE
  Example 1 -A public water system issued $50 million in debt on June 1, 1995 and completed construction of
  an upgrade project in June of 1996. Construction commenced after July 1, 1993. The state's  DWSRF can pur-
  chase this debt (refinance) to  lower user fees.  Payments and cash draws for this project will  be made based on
  the federal proportional share (see section II of this report).  Cash draws will be made in equal amounts over
  the maximum number of quarters over which payments can be made.  If payments are made  on this grant over
  8 quarters and the federal draw ratio is 81%, the state can draw $5.06 million each quarter.

  Example 2 -A public water system issued $50 million in debt on May 1, 1996 to finance construction of its
  drinking water facilities and initiated  construction in June 1996. The system indicates interest in refinancing the
  project, submits preapplication information to the state, and is determined  to be a high priority project based
  on SDWA compliance, protection of public health, and affordability considerations.  At the time of the loan
  agreement, the system has spent $30 million on construction. The DWSRF can  be used to refinance or  pur-
  chase the $30 million in equal cash draws over the maximum number of quarters over which payments can  be
  made.  If payments are made on this grant over 8 quarters and the federal draw ratio is 81%, the state can draw
  $3.04 million each quarter for the refinanced portion of the project. The remaining $20 million will be treated
  the same as a loan and cash will be drawn as costs are  incurred.

  Example 3 -A public water system issued $50 million in debt on August 1, 1996. At the time of the loan
  agreement, there  has been no construction. Just like a loan, cash can be drawn as costs are incurred.

  Example 4 -A public water system constructed a treatment facility costing $50 million in 1992 by issuing
  local revenue bonds.  Since the bonds were issued and construction began  prior to July 1, 1993, the project may
  not be  refinanced  through the DWSRF.
Purchase  of Insurance
The DWSRF may be used to purchase INSURANCE to guaran-
tee local debt service payments. The flow of funds is shown
in Figure  12.

Payment  Rules
A payment schedule will be negotiated between the state and
EPA based on the state's schedule  of binding commitments.
Binding commitments will reflect the due dates for insurance
premiums.  Payments may start no more than one year
before the state enters into a binding commitment.

Cash Draw Rules
States may draw on the ACH to obtain cash for the proportion-
ate federal share of insurance premiums as they come due.

Guarantees
States may use the ACH to guarantee local debt or obligations
as shown in Figure 13. Because the federal capitalization grant
is being used to fund a contingent liability there may or may
not be actual  cash needs.  Since cash draws are generally
allowed only for incurred costs, cash could not be drawn and
funds would not be transferred unless there were an impend-
ing default. Therefore, cash draw procedures were estab-
lished to cover default and non-default situations as follows:
• In case of a non-default, cash is drawn through the ACH to
 the DWSRF as construction progresses so that the DWSRF
 will eventually have the cash from the ACH even though the
 assistance recipient has not received money directly from
 the DWSRF.
• In case of a default, cash is immediately available up to the
 portion of the federal capitalization grant pledged as the
 guarantee, and

Payment  Rules
Payments  will be made based on the schedule of binding
commitments. States must enter into binding commitments
that are equal to the amount of the capitalization grant to be
deposited  into the Fund and state match within one year of
receiving the payment.

Cash Draw Rules
In  a non-default situation, the rules allow for cash to be drawn
even though the state does not need it to correct the default
of a local recipient.  In a default situation, the rules make cash
available to protect the holder of local debt.

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                                           ROCEDURES
                                                                                          Debt Holders
  State Government

                  State Match
                                                                                  >  ^
                                                    Purchase  \.ej^^ Cash         g
                                                    Insurance              (If necessary) x^  /
                                                 ^            Insurance
                                               <^             Company
                                                                                       Assistance Recipient
                                                                                           Contractor
Figure 12. Purchase of Insurance:  (1) EPA capitalization grant and state match are placed in DWSRF.  (2)
DWSRF purchases insurance to guarantee local debt service payments. (3) Assistance recipient issues debt, and
(4)  receives proceeds from sale. (5) Assistance recipient uses these funds to pay invoices from contractor or
vendor.  (6) Assistance recipient repays its debt to debt holders. (7)  In the event of default, insurance company pro-
vides funds for repayment of debt  holders.

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                                      PROCEDURE
                                                                                      Debt Holders
   State Government
                  State Match
                Capitalization   «_,
                    Grant
   &EFA
                                                  Cash (If necessary)
                                                  Guarantee
                             Assistance Recipient
                                                                                      Contractor
Figure 13. Guarantee Local Debt Obligations: (1) EPA capitalization grant and state match are placed in
DWSRF.  (2) DWSRF guarantees local debt or obligations.  (3) Assistance recipient issues debt, and (4) receives pro-
ceeds from sale.  (5) Assistance recipient uses these funds to pay invoices from contractor or vendor.  (6) Assistance
recipient repays debt to debt holders. (7)  In the event of default, DWSRF repays debt holders as guaranteed.
Non-Default  Conditions
To allow for the conversion of the guarantee portion of the
capitalization grant to cash, EPA will negotiate cash draws for
the proportionate federal share of the guaranteed reserve.
The schedule will be based on the proportionate federal share
of the actual incurred construction cost multiplied by the ratio
of the guarantee reserve to the amount guaranteed.

Default Conditions
If the guarantee provision is triggered because of an imminent

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                                             ROCEDURES
default in debt service payments on the guaranteed debt, the
following procedures will apply:
• The state may request an immediate cash draw up to the
  total amount of the federal capitalization grant committed to
  the guarantee.
• If a default results in a reduction but not a complete deple-
  tion of the DWSRF guarantee reserve, the state may negoti-
  ate a payment and cash draw schedule for the remaining
  amount of the guarantee, up to  the rate based on the non-
  default rules. (See example below).
Revenue  or Security for  Fund
Debt Obligations (Leveraging)
States may "leverage" the federal capitalization grant to
increase the total amount of funding available. Leveraging is
accomplished by using the  Fund assets as a source of rev-
enue or security  for the payment of the principal and interest
on revenue bonds  issued by the state. For example, a state
may use the federal capitalization grant and state match to
establish a debt service reserve fund for bonds issued by the
DWSRF. With the security provided by the debt service
  A state is planning to provide a guarantee with a portion of its capitalization funding. The state will receive a
  $30 million grant.  Five million dollars will be used for set-aside activities leaving $25 million of the capitaliza-
  tion grant and $6 million from state match for Fund activities. The federal share for cash draws is 81  percent
  ($25M/$31M).

  The state wishes to establish  a guarantee of 4 million dollars to support the construction of water system
  infrastructure costing $48 million.  The state will use $3.24 million in federal funds (81 percent) and $.76 mil-
  lion of state match(19 percent) for guarantees.

  Payments - Payments for funds to be used  for guarantees are based on the schedule of binding commitments.
  For example, assuming binding commitments will occur equally over two quarters the payments associated with
  the $3.24 million federal guarantee funding would  be:

       •1st quarter - $1.62 million
       • 2nd quarter - $1.62 million

  The state will also make its 19 percent match  payments to the DWSRF on the same schedule:

       •1st quarter - $.38 million
       • 2nd quarter - $.38 million

  Cash draws - Draws through the ACH  to the DWSRF are based on the rate at which construction related
  costs occur. Assuming $2 million in costs are incurred  in the first quarter, the state  draws $.13 million from
  the ACH which  is computed as follows: cost ($2M) x proportionate federal share ($25M/$31 M) x ratio of
  reserve to amount guaranteed ($4M/$48M). The associated state match of $.03M is computed as follows: cost
  ($2M) x proportionate state share ($6M/$31 M) x  ratio of reserve to amount guaranteed ($4M/$48M).The
  guarantee fund now contains  a total of $.16M  ($.13 million of federal capitalization and $.03M of state match).

  Default - If a default is imminent for a system because it is unable to pay $1 million in debt service on bonds
  that the DWSRF has guaranteed, the state would take the following steps:

       • Compute the amount needed to bring the guarantee fund to $1 million ($1 M-$.1 6M) or $.84 million.
        ($.16 million is the amount in the guarantee  fund)
       • Determine the proportionate federal share ($25M/$31 M x  $.84M) or $.68  million.
       • Determine the proportionate state share ($6M/$31 M x  $.84M) or $.16 million.
       • Draw $.68 million through the ACH which, when added  to  the state's match ($.16M) and the preexisting
        amount in the guarantee account of $.16 million, will  provide the $1 million for debt service on the guar-
        anteed bonds.
       • Renegotiate the cash draw schedule with the EPA to  receive the remaining  $2.43 million ($3.24M-$.1 3M-
        $.68M) based on proportionate federal share of incurred cost ($25M/$31 M), multiplied  by the ratio of
        the remaining reserve to the remaining amount guaranteed  ($3M/$46M).

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                                        PROCEDURES
                                 Bond Holders
  State Government
                 State Match
               Capitalization
                   Grant
   &EPA
     O  Loan
   Repayments
                                          Contractor or Vendor
                    Assistance
                    Recipient
Disbursements
Cash to"   0
Pay Invoices
Figure 14. Leveraging in the DWSRF:  (1) EPA capitalization grant and state match are placed in DWSRF.
(2) DWSRF  issues bonds, and (3)  receives proceeds from sale. (4)  DWSRF disburses funds to DWSRF loan recipients.
(5) Assistance recipients use these funds to pay invoices from contractors  and/or vendors.  (6) Assistance recipients
repay loans to DWSRF.  (7) DWSRF repays debt to bond holders from repayments or from repayments and interest
from debt reserve.
reserve, the state is able to issue bonds in an amount larger
than the federal capitalization grant (e.g., 200 percent larger)
and finance more projects earlier in the Program. Bond princi-
pal and interest payments are funded with DWSRF loan repay-
ments and interest earned on the capitalization grant funds
deposited in the debt service reserve fund. The general
process that states use to access the funds in a leveraged pro-
gram is illustrated in Figure 14.

Payment Rules
Payments will be made based on the schedule of binding
commitments. States must enter into binding commitments
          that are equal to the amount of the capitalization grant and
          associated state match designated for the Fund within one
          year of receiving the payment.  Binding commitments refer to
          the individual loans with the local recipients, not the security
          agreement itself.

          Cash Draw Rules
          When a state uses the federal capitalization grant as security
          for state debt in the form of a debt service reserve, cash
          draws  are not needed to provide disbursements for incurred
          project costs. These costs are covered by bond proceeds.
          As bond proceeds are disbursed to cover incurred costs,

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                                             ROCEDURES
funds are drawn through the ACH into the debt service
reserve. In this case, the state may draw cash through the
ACH according to the following procedures:

Non-Default Conditions
The state may draw and deposit cash into the debt service
reserve, as actual construction costs are incurred, for projects
constructed with bond proceeds secured by the federal capital-
ization grant.  Cash draws will be based on the PROPORTION-
ATE FEDERAL SHARE of the incurred construction costs. The
proportionate share may be determined in either of two ways:
• "All Projects Method" - Assuming the state match is being
  used in the debt service reserve fund, the federal share
  cash  draw ratio is equal to the ratio of the federal share of
  the debt service reserve fund (capitalization grant - set-
  asides) to the total debt service reserve fund, multiplied by
  the ratio of the total reserve fund (capitalization grant - set-
  asides + state match) to the net bond proceeds. The state
  share is equal to the ratio of the state share of the debt ser-
  vice reserve fund to the total debt service reserve fund,
  multiplied by the ratio of the total reserve fund to the net
  bond proceeds.

  In cases where a state is using only capitalization grant
  funds for the reserve,  the amount of the reserve is equal to
  the capitalization grant minus set-asides and the state
  match would be included with the net bond proceeds in
  this equation.

• "Group of Projects Method" - As an alternative, a state can
  identify a group of public water system projects whose cost
  is approximately equal to the amount of federal funds plus
  state  match being used as security in the debt service
  reserve.  The state can then draw cash based on the
  incurred costs for those projects multiplied by the ratio of the
  federal portion of the debt service reserve fund to the total
  debt service reserve fund.  This method may actually draw
  federal funds more quickly than the all projects method,
  depending on the pace of construction of the selected group
  of projects versus the pace of all project construction.
The examples on page 28 illustrate how these two methods
may be used to calculate cash draw ratios for a leveraged
DWSRF Program.

Default Conditions
If the security provision is triggered because of an imminent
default in debt service payments, the state may request an
immediate cash draw up to that portion of the federal capital-
ization grant committed to secure the state bonds.  If a bal-
ance of unused capitalization grant remains after the default is
covered, the state must negotiate a revised schedule for the
remaining amount.

Aggressive Leveraging
In a situation where the above cash draw rules would signifi-
cantly frustrate a state's leveraged program, EPA may allow an
exception to these rules and provide for a more accelerated
cash draw.  A state contemplating aggressive leveraging must
meet with Regional and Headquarters staff to  explain its lever-
aging approach as part of its capitalization grant application.
EPA Headquarters will make case-by-case determinations to
allow exceptions prior to the award of each capitalization grant.

To be eligible for aggressive leveraging, a state must demon-
strate the following:
• There are eligible projects ready to proceed in the immedi-
  ate future with enough cost to justify the amount of the
  secured bond issue;
• The absence of cash on an accelerated basis will substan-
  tially delay these projects;
• If accelerated  cash draws are allowed, the Fund will pro-
  vide substantially more assistance; and
• The long-term viability of the state program to meet water
  quality needs will be protected.

If these conditions are met, the state and EPA may negotiate
an accelerated cash draw schedule. However, in non-default
conditions,  accelerated cash draws can be made no faster
than in equal amounts over the maximum number of quarters
that payments can be made.

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                                           PROCEDURES
Cash Draw Option for Combined
Direct  Loan/Leveraged Programs
If a DWSRF Program includes both direct loans and leveraged
loans, it can have two cash draw ratios. One, using grant spe-
                     cific or rolling average proportionality, would apply to the
                     direct loan portion of the program. A second, using either the
                     all projects method or the group of projects method, would
                     apply to the leveraged portion of the program.
   Example 1 -A DWSRF Program accepts a $1 0 million capitalization grant and provides a $2 million state
   match. The state plans on using $1 million for set-asides. The state issues $24 million of bonds to leverage the
   program. Using the "all  projects"  method, if the DWSRF  receives a disbursement request of $1.5 million for
   incurred construction costs, the state may make a cash draw of $0.59 million through the ACH based on the
   all projects method:
   Federal Portion of
   Debt Service Reserve
   Total  Reserve
   Bond Proceeds

   Federal Cash
   Draw Ratio
Capitalization Grant - Set-asides

$10 million - $1 million = $9 million

Federal + State Portion

$9  million + $2 million = $11  million

$24 million - $1 million issuance fees = $23 million
                                        Federal Portion  of Reserve
                                              Total Reserve
                                     Total Reserve
                                  Net Bond Proceeds
   Cash  Draw
 $9 million    $11 million   =   39%
$11  million    $23 million

$1.5 million  x   39% = $0.59  million
   Example 2 - The same scenario as above except the state wishes to use the "group of projects" method for
   cash draws and the disbursement request is for $1.5 million.  For a disbursement request the state would make
   the same cash draw of $1.23 million.
   Federal Portion of
   Debt Service Reserve
   Total  Reserve


   Federal Cash
   Draw Ratio


   Cash  Draw
Capitalization Grant - Set-asides

$10 million - $1 million = $9 million

Federal + State Portions

$9  million + $2 million = $11  million

Federal Portion of Reserve    =   $9 million   =   82%
       Total Reserve              $11 million

$1.5 million  x 82% = $1.23 million

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                                            ROCEDURES
Appendix  A
Glossary of Terminology

Allotment
Amount available to a state from appropriated funds.

Appropriation
Statutory authority that allows federal agencies to incur obliga-
tions and to make payments out of the Treasury for specific
purposes.

Assistance Recipient
A public water system or other entity which receives assistance
under the DWSRF Program.

Authorization
Legislation which authorizes the appropriation of funds to
implement program activities. It does not provide any money,
only the appropriation act itself permits the withdrawal of funds
from the Treasury.

Binding Commitments
Binding commitments are legal agreements between the state
and the local recipient that define the terms and the timing for
assistance under the DWSRF.

Cash Draw
A cash draw is the transfer of cash through the ACH to the
DWSRF Program. Upon a state's request for a cash draw
through the ACH, the Treasury will transfer funds to the DWSRF
Program account established in the state's bank.

Construction
The planning, design, and building of eligible facilities.

Disbursements
A disbursement is the transfer of cash from the DWSRF
Program to the assistance recipient or others.
Guarantee
A promise to provide local debtholders with full and timely pay-
ment of principal and interest on the local debt obligation to the
limit of the guarantee, in the event of default by the issuer. The
DWSRF Program may not, however, grant funds to  fund a
reserve account for a local debt issue.

Incurred Cost
Costs that are eligible for disbursement from the DWSRF
Program including construction related costs, administrative
costs or costs for any of the forms of assistance authorized
under SDWA.  The DWSRF Program or the assistance recipient
must first incur a cost, but not necessarily disburse  funds for
that cost,  in order for cash to be drawn through the ACH.

Insurance
Bond insurance, available from a number of insurance compa-
nies, to guarantee debt service payment of system debt.

Interest Subsidy
The use of funds to reduce the interest cost on  state or local
bonds by providing a subsidy for all or part of the interest
payment.

Leveraging
Leveraging refers to the use of the capitalization grant as  the
security for the repayment of state bonds.  Leveraging does not
include state financing arrangements in which repayment
streams, rather than the capitalization grant, are used as the pri-
mary security for the bond issue.

Loans
An  agreement between the DWSRF Program and the local recip-
ient through which the DWSRF provides funds for eligible assis-
tance and the recipient promises to repay the principal sum
back to the DWSRF Program over a period not to exceed  20
years, or 30 years in the case of loans to disadvantaged  com-
munities.  Interest rates must be established at  or below market
interest rates and may include zero interest loans. Repayments
for loans made under 1452(k)(l) may be deposited into the
Fund or in a separate account  dedicated to 1452(k)(l)  activities.

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                                             GLOSSARY
Obligation
The commitment of funds that are allotted to a specific state,
through a grant or contract agreement.

Payments
An action by EPA to increase the amount of funds available for
cash draw through the ACH (i.e. the ceiling). Through a pay-
ment, the EPA makes funds available to the state up to the
amount of the capitalization grant. A payment is not a transfer of
cash to the state but only an authorization making funds avail-
able for transfer to the state when a cash draw request is sub-
mitted.  A payment schedule, indicating the timing and size of
the payments to be made, will be entered into between EPA and
the state. It will be based on the state's projection of binding
commitments, the rules for cash draws and the use of the funds.

Proportionate Federal Share
That portion of incurred costs that represents the federal share,
taking into account the requirement that the state provide a 20%
match.
Purchase of Local Debt
A DWSRF may purchase local debt obligations where such
debt was incurred and construction was initiated after July 1,
1993.  The DWSRF may purchase incremental disbursement
bonds from local governments on a schedule that coincides
with the rate at which construction related costs are expected to
be incurred for that project.

Refinancing
A DWSRF may refinance local debt obligations of municipal,
intermunicipal or interstate agencies at or below market rates, if
the initial debt was incurred and construction was initiated after
July 1, 1993.

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