Concept  Paper
for  IrcpSsmentation  of
                   and VI
          QUALITY ACT OF  1987
                  DATE: April 8, 1987
                  Planning and Aaalyxij Division
                  Offic* of Municipal Pollution Control
                  TJ.S. Environmental Protection Agency
                  401 M Street, S.W. (WH-546)
                  Washington, DX1  20460

                        C. TABLE OF CONTENTS


   A. Purpose  of Concept  Paper                                      1

   B. Contents  of  the Paper                                         2

   C. Table of  Content*                                            i-iv





   .*.. National  Reserves and Stats  Set-aaides                        6

      1. National  Reserves                                          6

         a. Marine CSO and Estuary Reserve                          6

         b. Graata to Indian Tribes                                 7

      2. State  Set-As ides                                           9

         i. 205(g) Management Assistance Grants                     8

         b. 205(h) Rural  Set-aside                                -.0

         s . -Q£(. i) Innovative and  Alternative 'T'-icimoiagv           10

         d. 205(j) VX$A Planning, Non-point Source  and  Estuaries    11

         e. 205(m) Optional Transfer  of Title II Fund  to
              Title VI                                             12

   B. Design/Build Projects                                        13

   C. Termination  of  the  Higher Federal Share for                  15
        Phased  and Segmented Projects

   D. Agreements on Eligible Costs                                15
                                  Page  i

               GRANT PROGRAM

  A.  Purpose                                                       16

  B.  Types  of  Assistance                                          17

      !. The  SRF May Not Award Grants                               17

      2. Loans                                                      17

        a.  Ingres :£atc                                          1?

        b.  Payment  to  SRF                                         18

        c.  Dedicated Repayment Source                              18

        d.  Repayment to SRF                                       18

        s-  Prtvsntion  cif Double Seas fits                           19

      3. Uses Other  than as  Loans                                   19

        a.  Refinancing                                            19

        b.  Guarantees, Insurance                                   20

        c.  Leveraging                                              20

        d.  Subs t A t e. Revo Iving Funds                                21

        e.  Administrative Expenses                                21

        f.  Eara in^-ir sa v                                          Z2

        g= Assistance  for the non-Federal  Share                    22

  C.  Notice  of Intent  to Use  Titls II  Allotments  for SRF Programs  22

  D.  Capitalization Grant Application  and  Agreement                23

      1. SRF -  An  Instrumentality  of  the State                      24

      2. Payment Schedule                                          24

      3. State  Match                                               25

                                 Page  i i

   4. Cjas=.itns «•:,:! for 120 Percent  la One Year                    25

   5. Conditions Applying to All Funds                           26

   6. Funds As A Result Of Capitalization Grants  --              27
       Birst Use for Enforceable Requirements

   7. Funds Directly Made Available from Capitalization         2$
       Grants -- Title  11 Xequ ;': rosiest i         '

   J. 3s t -aa idea .from 75. ~:.<: VI  *.!.'. a tasatj                        34

   9- Scale Laws aad Procedures                                  34

  10. State Accounting  and Auditing Procedures                   34

  11. Recipient Accounting and Auditing Procedures               35

  i2. Zsvivo amenta I .Rsvje-w Rsqui r erne at s                          36

E. Intended Use Plan, Annual Report                              37

   1. Intended Use Plan                                          37

      \. List of ?roj«ct3                                        37

      b. Long and Short Term Goals                               37

      c. Information on the Activities  to be Supported          38

      d. Timing and Use of Funds                                 J3
      i. Cr i c a r : a ^ad Meth.cci  for Distribution  uf                 38
           Funds Including  -- Public  Conxnest

      f. Interim Reporting  Requirements                          38

   2. Annual Report                                              38
                              Page  iii

  F. EPA'« Role - Oversight of Capitalization Grunt                39

     1. Program Level Review                                       39

     2. Information Management                                     40

     3. Annual .Review jad Ccaxpiiiac« Aasurrnce                     40

     4. He cavei~ of Fu^dj                                          41

     ;. Audi!-. lav*;-"W                                               42


   A.  Annual Operations of an SRF

   B.  Conditions on the Use of Funds  in a Federally Capitalized
         State Revolving Fund

   C.  Catalogue of Authorities £f;sc:isg tha 2?A  Coaa nr»ic-; ion
         Grants Program

   D.  Examples of Contents for the Annual Report

   S.  Timing of Key Activities for Fiscal Yean 1987-1990:
         Fuaiiiaj from 205(m)
                                Page  iv

                              CONCEPT PAPER
                     OF THE WATER QUALITY ACT OF  1987
   A. Purpose of Concept Paper

      This paper describes the Environmental Protection Agency's  (EPA)
interpretation of the Water Quality Act of  1987  (1987 Amendments), -which
unends the Federal Water Pollution Control Act.  Thii  interpretation is
         f.<3 provide T.b.e baaij for the  '.rap! smcn tat ioa of  thsss  ame.adme;it s
     The purpose of thia Concept Paper  is  to provide  interested  parties
vith the opportunity to review and respond  to EPA't  interpretation of  the
dineaued ;ona iruct ion grants program and  the newly  created  capitalization
grant program, whereby funds may be obligated to State Water  Poilucion
Control Revolving Funds.

      After ;he review period for this Concept Paper  ends,  EPA wi i i  decide
vnetaar iay 9 revisions in  '. tte Ac c 'will  be  dsvej. opesi  »a  rsguiationa,  o r
whether guidance alone will provide a suitable operational  rr^ias^vori.

      Comments should be addressed to Geoffrey Cooper, U.S.   Eavi r onmenr a 1
Protection Agency, Office  of Municipal Pollution Control  (WH-546), 401 M
Street, SW, Washington, D.C. 20460.  In  order to use  these  comments  in
guidance or rulemaking, EPA must receive  them by May  20,  1987.

   B,. Contents of the Paper

      Pare I of this paper briefly  reviews  tie  history o*  the construction
-•raasa -5 .? a 3 ? .rcn ind 1i ^hl i g.if.-s. -.haasjia^  tT«ada.
     Part II describes the approach EPA  is  proposing t j uae In developing
the guidance, and rules if necessary,  to  implement  the  1987 Amendments and
sets forth a tentative schedule.
     Part III describsa :h

      In 1972, Co£--r«as *nacr
      Beginning in fiscal year 1987, States will have the ope ion  to use a
portion of their annual construction grants allotments for the
capitalization of SRFs.  Separate appropriations for SRF capitalization
grants are authorized  from fiscal year 1989 through fiscal y«ar 1994.
Aftsr the management of fiscal year 1994 funds is completed,  the  Federal
role will no longer include financial assistance to States or
municipalities for wastewater treatment faelii'ey canatrnctIcn.  Tie Siatas
and municipaliti«3 will thereafter have the sole responsibility for
providing financing to meet the enforceable requirements of the Act.


     A decision has not yet been made whether, in addition co guidance,
regulations will be necessary to implement the amended construction grant
program and the newly  created capitalization grant program of Title VI.
The amendments to Title II and the legislative language of Title  VI are
clear, detailed, and straight-forward.  The areaa which day sail  for
regulatory interpretation appear to be limited in number and  scope.

     Title VI in particular contains areas of considerable complexity  and
tarsia ^micJd :ire iaadequa. t s iy defined.  Re gui a t i ona. may be nscaaaary to
clarify these matters  and co assure consistent, 'jindinjj1 EPA
interpretations.  Regulations may also be necessary to assure that the
flexibility of the Act is not inadvertently restricted by other programs
or Agency regulations.  Whichever option is eventually selected,  EPA
intends to implement the program in a manner which adheres as nearly as
possible to the language and the intent of the Water Quality Act, while
providing States with  sufficient latitude to operate their SRF programs.

     In order to assist the Agency in determining whether, and to what
extent, regulations are necessary, this Concept Paper is being distributed
widely to solicit comments on the Agency's interpretations, of :he  1987
                                  Page 4

•meadmeats.   The Agency's decision on the approach to program
.mplemeata t i on will be made soon after tae conaneat period  «nda  on May  15,

    Regardless of whether that decision.  is to  implement the  program by
zcaas  of  guidance, regulation, or both, this Concept Paper will  serve  as
the  basis for preparing interim guidance  to allow States and  *. Jis Riijioas
to negotiate  capitalization graai; agrsjaaiens £°* 53.F pyo^raam  AS  ioaa is
ooss ible .

    Should  the Agency decide that some regulations will be promulgated to
facilitate  the long term management of the program, the Concept  Paper  and


   A.  National Reserves =ind State Set-aiidaa

     The 1987 Amendments continue cue authority  for  State  set-asides  and
33 vabl isa. raft) ^aciaaal jr^srve*.  Fuacti-asj  for faa  riatitmai  rsncrvaa,  tis
new set-asides for non-point source  and  estuary  purposes,  and the  optional
...i'fer of Title II funds for Title VI  purposes,  shall  apply to  any
appropriations bill passed after enactment  of the Water  Quality Act  of

       1. National Reserves

     The national reserves provide funding  ior projects  to  abate  combined
sewer overflows (CSO) into marine bays and  estuaries  and for  awarding
construction grants to Indian Tribes.  Ual iis Stata  j«t-*sides  and che
Governor's discretionary authority, which  are percentage amounts  set  aside
by the State or the Regional Administrator  from  each State's  allotment,  or
from each 3'iat*'a share of che auxhor izax ion  in  ". iie  cams of stats
management aaaiatanca graata, aationai rGaurverj  are  Amounts ieduc.tad  by
•;he EPA Admiai a r,7a'cor from tiie ^ntira .ippropr ia.-c i on,  before allotment

          a. Marine CSO and Estuaries Reserve

      The marine CSO and estuaries reserve  is 1  percent  of  the
appropriation for fiscal years 1987  and  1988, and  1.5  percent of  the
entire appropriation in fiscal years  1989  and 1990.  Two-thirds of the
amount of the reserve shall be available  to address water  quality  problems
resulting from marine CSO discharges  into marine bays  and  estuaries.   The
Agency intends to use existing regulations  (40 CFR Part  35.2024(b))  and
guidance to award f-inds for marine CSO projects  from this  set-aside.
                                   Page  6

Applications for marine CSO grant* from fiscal year  1987  funds must  be
 tubmitted to the Regional Administrator by September  1.  1937.

      The remaining one-third of the marine CSO and  estuaries  reserve  is
 :o be used to supplement the funds available  to tia  !!aMeaal Estuary
 'rogram usder Section 320 of th-. Act.  These  funds will  be  administered
 •nder guidance o? regulations to be developed by  the  Office of Marine  and
 Estuarine Protection and TV! 1 i not b« discussed ia i'urtaer detail  is  this
 Concept Paper.

          b. Grants to Indian Tribes

      Under :hs 1987 Amendments, one-half of  oae  percent  of the  sums
appropriated under section 207 will be reserved for  grants  for  P,HB
development of wast; treatment management plans and  for  the construction
of sewage treatment works to serve Indian tribes.

      In cooperation with the Indian Health Service  (IHS),  H?A -will
conduct a 12-month survey/study to assess the sewage  treatment needs of
ladiun Tribes.  Tlie survey ~sriil slso «tudy how allotments to States  under
lection .105 can best meet Indian needs.  The  1987 Amendments ilso  require
 r.he Admiai 3 r ra t or -co specify iiow iribea. -i?c to oe aaaia-cad  ia asating
their wastewater management planning and -ionu CTUC- ion aectia, and.  how ttic.
Agency will maximize Indian participation in  the  administration  of  these
p r o g r uns .

      The Act authorizes EPA to treat  Indian  tribes  as States  for  purposes
of Title II and other sections of the Act. but only where the  tribe  has
the necessary capability and authority to carry out  the  functions  of the
Act and applicable regulations.  The 1987 Amendments  require the Agency  to
promulgate regulations before August 5, 1987  on how  Indian  tribes will  be
treated as States.  For the purposes of the construction  grants  program.
                                  Page  7

EPA'a thinking  is to apply the existing regulations  at 40 CFR,
Part 35, Subpart J that govern State delegation agreements.

      In view of the phase-out of the construction grants program  in  1990,
and the limited time in which to fully develop the cocnnical  and
managerial capabilities to manage »he projrim,, iv$ -riry po»*.lbi« that
Indian *.?ib«s any elect to forego delegated authority  to manage the
construction grants program.

     To assure that there are alternative administrative arrangements.
EPA is exploring the feasibility of an administrative  arrangement based  on
the existing relationship between the Indian Health Service  and the
cribes.  Uaaer $ais approach tie THS could admiaia tar  the Title II  funds
through its existing sanitation facilities program.  IH5 guidance would
apply in the interest of IHS program consistency and administrative
efficiency, however, EPA may include additional requirement*, such  as  i
requirement tiat projects with CM&. eligible needs r*c*i7s first priority
for funding.  Alternatively, EPA could enter into an agreement whertby  the
IHS would act as a "delegated State" and administer rhs set  aside under
*.lie construction grants i'auias ions iad aa 2?A aa.tional rsriori.ty list.
     EPA will aatabiiaa a wo rijjr oup  to  svaiuata  these-  liiernative-
approaches on Title II implementation for  Indian Tribes.  The workgroup,
which will include representatives of the  tribes,  IHS. Regions,  and
States, will study proposed implementation approaches,  impacts ,  and
regulatory barriers to implementation,  and other major activities  as  they
relate to applying Title II provisions  to  Indian tribes.

      The actual allocation of  the set-aside funds will  be  baaed  on. sera-
form of priority ranking system that  includes criteria for  determining
eligibility and priority.  For  example, at least the following  approaches
will be considered:
                                  Page  8

     -- Aa ladiaa ?r-3j*sr Priority List developed by an Indian tribe, if
        the Indian tribe receives program delegacies,

     -- A National Priority List developed by EPA in cooperation with IHS
        if IHS assumes responsibility aa * "iei^jaKd Star.-!,"

     -- A Project Funding List developed by IHS if IHS administers

      The Act  does not authorize the Agency to treat Indian Tribes as
States for purposes of awarding capitalization grants under Title VI, but
they may be eligible for SRF assistance in the same manner as
jiun A w i p a i i i i 4 u .

         2. State Set -as ides

         i. Section 2Q5(g) Management Assistance Grants

      The authority for the set-asides for State management assistance
grxnxa, -whicii  are deducted, from sach State's share of the Title II
authorization, is extended through fiscal year 1994.  Howevjr,
year 1990,  so the sourcs of funds for Stacs management -iaaiatancs grants
after 1990 is unclear.

      By extending section 205(g) authority and not tome other set-asides
to 1994, Congress appears to recognize that construction grant management
activities will continue for several years after fiscal year 1990 and  to
intend for funds to be available for delegated States to phase out the
                                  Page 9

      Moat States -will :««3i *o coordi.nats operation! of  the  construction
grant and the capitalization grant programs, and EPA expects  to  facilitate
•uch coordination by allowing States to use up to 4 percent  of  their
annual authorizations in a combined fashion for both purposes.   However,
States may not use more than 4 percent of the amount 
    Subsection e. of this Section describes how the amounts s^t aside
under the rural and the innovative/alternative technology provisions may
be effected in any year in which funds are transferred to an SRF under
section 205(m).
         4U Section 305(j) Water Quality Management Planning
              Non-Point Source and cscuary Programs

     The set-aside for water quality management planning of section
205(j)(l) is continued under Title II and a similar set-aside for planning
under sections 205(j) and 303 is included in the new Title VI.

     Section 316(d) of the 1987 Amendments (new section 2Q5(j)(S) of  the
Act) creates a set-aside for the Nonpoint Source Pollution Management
Programs developed under the new section 319.  Each State must reserve  the
gTrtnisr of 3100,000 «r one percent of its annual allotment.  The State  is
required to obligate the first $100,000 of this reserve annually for
development and implementation of nonpoint source pollution management
3 r o g r amB or f orf ei v; - the -inobl i %c. t ?.d. balance of that first 5100,000  to
rsallotment.  These 205(j) funds shall be reallotted to States that  are
,-ibiu to obiiija'ce ;juca. funds .for ".he ^uraoaes of jecxion 319-  'Whsre  the
reserve for any State exceeds $100.000. funds  in szcess of 'che- sanda t ory
$100,000 may be used by the State for any purposes defined under Title  II
of the Act.

      The nonpoint  source management set-aside can be used for the  same
purposes as funds authorized to be appropriated under new section 319(j)
of the Act for developing and implementing approved nonpoint source
management programs.  In addition, section 316(c) amends 20l(g)(l)  to mate
eligible, under the Governor's 20 percent discretionary provision,  grants
for the development and implementation of non-point source management
programs and demonstration projects (3l9(h)),  and grants for protecting
                                 Page 11

groundw&ter (3l9(i)). The Conference Report states that sections  201(g)(l)
and 20S(jX£) funds can be used for "financial assistance  to  individuals
only insofar as the assistance is related to costs of implementing
demonstration projects."

      The new sections 60l(a) and 603(c) provide that SRF  funds may  be
used for implementing a management program under section 319  and  for
developing ajad Impiesisn': lag a .-ionae ?Ta« ion ind riaaagssment  prnjram under
section 320.

      Guidance or regulations to implement these programs will be
developed by the Office of Water Regulations and Standards and will  not  be
diseuaaed in further detail ia this Concept Paper.

        e. Section 205(m) Optional Transfer of Title II Funds to
             Title VI

      Sacxion 205(m) of :h« 1937 Amendments Allows :ae 2;a:e  ;o  transfer
funds from the State's Title II allotment for deposit into the SRF  to  use
ia a, Title VI capitalization grant.  The amount of the.Title  II  allotment
that can be transferred ia limited to 50 percent of the State'a  fiscal
year 1987 a j. 1 o trie a u -md 75 -j:crcant of tie Stata's fiscal year 1988
411 o czaent .  Tiieru ia ao I imi i on. ':ie imouat OE che depoai^: for fiscal
years 1989 and 1990.  Section 20S(m) specifically exempts  only sums
reserved under section 205(j), including subsections (l) and  (S), from
deposit into an SRF under this provision.

      The Title II set-aaide calculations may be affected  in  any  year  in
which Title II funds are' transferred into an SRF.  Because Title  VI
exempts only section 205(j) from deposit into the SRF. it  appears that
Congress intended for the other statutory set-asides to be calculated
against the balance of each allotment remaining available  for Title  II
purposes.  EPA recognizes that under this preferred interpretation.
                                 Page 12

 oandatory tet-asides other than section 205(j) could be effectively
 sliminated by a State that deposits its eati/e 
costs at the applicable Federal shire.  An allowance will be provided  for
facility planning work if a Step 1 gzaat haa 20 s bsss vwardeo .for  the

      The grant tgteeman.: must a.'.,:3 provide:

      - Date* for the start and completion of construecion;

      - A schedule of payments for the Federal share;

      - Assurance that:

         -- tie prances h.aa adequate engineering and management
            ass is tsince ,
         -• the treatment works will be operable and will meet
            all progr ara r e q u i r erne n t a ,
         -- the treatment works will meet project performance
            standards or applicable permit rsquirsmest3 wi shin-
            one year following the agreed date of completion;

      - A requirement for a contractor's bond in ac Amount  ~o ^rotee-:
        ~as' rsdcrai  in.tsrea.t.; and,

      - Other terms  and conditions to aaaure compliance with program
        requirements, C-jcluding the submission of plans/specifications
        and payment  provisions as Stated in section 203(a),  (b), and  (c),
        which do not apply).

      To assure compliance, EPA wi 11 retain 10 percent of each  grant
payment awarded for  design/build projects.  In the case of  non-compliance
the Federal contribution wi 11 be recovered.  Excess Federal  funds
remaining in a design/build grant will be deobligated and returned  to  the
State's allo tme n t.

                                 Page 14

         C. Termination of Higher Federal  Share  for  Phaasd
              or S egmented Projects

      Phaoes or segments of projecti whicii previously  recaived  %  Federal
grant share of 75 percent, or  85 ?srrant for  innovative  and  alternative
'.aehnalasias, will no longer be eligible for  that  level  of funding  after
October 1, 1990.  On  :nat dace, this Federal  ahare  for  *il  prajastsi  <~vi .1.1  be
no more ;h»n 55 percent, and no more than  75  percent for  innovative and
alternative technologies.  The reserve  capacity  eligibility  for
grandfathered phase/segmented  projects  continues to  be 20  years for grants
or grant amendments for these  projects  funded from any remaining  funds
appr opr .1 A tad undar Tills II.

         D. Ag r e erne nts On Eligible Costs

      Under section 103(A) of  the 1987  Amendments  all  construction  grant
agreements or amendments must  now include  a written  statement  specifying
the items of the proposed project which are  eligible for  Federal  payments.
Tlie Agency ;say -sot later- modify such eligibility determinations unless
they are found to have been made in violation of applicable  Federal
r."Eatttt«s and re.gui a.t i ens .  However, this provision does  not  prc&ibit jraat
amendments.  Eligibility determinations do not preclude  -.he  Agency  from
auditing a project or from wi thholding  or  recovering Federal funds  for
.costs which are found to be unreasonable,  unsupported  by  adequate
documentation, or otherwise unallowable under applicable  Federal  cost
principles, or are incurred on a project which fails to meet the  design
specifications or effluent limitations  contained  in  the  grant  agreement
and permit.  Guidance on this  provision was  issued by Memorandum, dated
March 31, 1987, to the EPA Regional Offices.
                                  Page  15


      A. Pur nose
      This lection dascr ibes. the Federal  jraquirssea'Ja  tssoc iated wi th the
SciiKs iravoiviag fund cap?. ?.a, 1 izat * oa. 
      Congress devi-ied the SRF Capitalization Grant  program with  two
overriding objectives in mind:   to  enable States  to  quiclen tfc  pace  of
vaatewater treatment facility construction  in order  to meet the
enforceable requirements of the  Clean Water Act,  and to  facilitate  the
establishment of permanent institutions  in  each State  that  would  provide
continuing sources of finite lag  needed to maintain water  quality.   EPA
.vi.'i laaura that these two objectives are achieved  through  the Agency's
implementation of the program.

      fi. Types of Assistance

         1. The SRF may not award grants

         2. Loans

      The primary type of financial  assistance an SRF  is  expected  to
provide la loans.  Properly conditioned  loans, as compared  with the other
types of financial assistance available  from SRFs ,  establish  repayaaeac
streams to the SRF to assist communities  in attaining  and maintaining
compliance -ariti, sJSie CvVA.  The conditions  placed on  loans  made  by  an SRF
-tie intended to maintain the Fund's  financial integrity wi tiout hampering
';ae'a flexibility to aa« 'che  Fund  ~o  addrsaa  tie diverse aesds  of
its communities.  As part of its fund management,  .strategy,  i  2;are  aiiouici
strive to ensure that money will be  continually available to meet  future
wastewater treatment needs.  Note,  however, that  loans may  not be made  to
support the non-Federal share of a  project  receiving grant  assistance
under the construction grants program.  However,  loans can  be made  for
phases, segments or stages of treatment works that  previously  received
grant assistance for other phases,  segments or stages.
                                 Page  17

         a. Interest Rate

      Loans must be made at or below market interest rates, and may
include zero intfcv.sat lo-iaa.  A State may exercise flexibility in setting
interest rates in order to accommodate the fiscal circumstances of
individual communities.  (The market interest rate is the rate the State
iscartains to b« pravn i \ iag in cia 5t»xst -cor aizailir ^uoiic -T»nria-
projects, and may be applied for a period of time or may be set as each
1 -•.n is made . )

         b. Repayment

      Principal and interest payments must be made at leas; annually
beginning not later than one year after the date of completion of
construction.  The loan must be fully amortized within twenty years of
completion of construction.  EPA intends to define completion of
construction as the date operations are initiated.  Each Stace has
complete flexibility in setting the yearly amount of the principal
repayment and the interest payment.  States may set standard State-wide
amortization schedules or addresa each loan on a viae-by-c^se ^aaia.

         c. Dedicated Repayment Sourcs

      Each loan recipient must establish one or more dedicated sources  of
revenue for repayment of the loan.  Dedicated sources of 'revenue could  be
special assessments, general tax pledges (full faith and credit of the
municipality), revenue bonds, user charges or other sources.  Recipients
constructing treatment w6rks with loan funds "directly made available by
capitalization grants under Title VI and section 205Cm)" of the Act must
also establish user charge systems as required under sections 602(b)(6 )
and 204(b)(l) of the Act which must satisfy the requirements of 40 CFR
Part 35 Subpart I.  However, user charge systems meeting EPA requirements
so aov necsasarily aaaurs or vequirs- that ;he aaer charts aystasi crovids
                                 Page 18

for the collection ox" J«bt service and, therefore, may not meet the
dedicated nource of revenue requirement established by lection 603(d).

         d. Payment to the SRF

      All payments of principal and interest must be credited to the SRF.

         j. Prsveatioa. of Doufaiu Benefit

      If a State makes a lo&n from its SRF in part  co finance the cost of
facility planning and the preparation of plans, specifications, and
estimates for construction of treatment works and subsequently awards the
:3cipi«nt a 3rant under section 20l(g) for construction of the treatment
works and an allowance under section -0! (-; j (2} , tie 4U«x<: *nuu x -insure that
the recipient will promptly repay the loan to the extent of the allowance.
For this reason, the State should generally not raaie these expenses
eligible for loans when the State plans to award a  subsequent grant for
cons true t ion.

         1. Uses Other Than as Loans

      In addition :o loans. State Revolving Funds may provide any of the
following types of financial -las i a sancs :

         a. Refinane ing

      An SRF may buy or refinance a local debt obligation at or below
market rate where such debt was incurred after March 7, 1985.  For
example, a municipality that, for NPDES compliance  reasons, cannot wait
for SRF funding to become available before commencing construction of its
wastewater treatment facility may obtain interim financing from another
source and seek refinancing through the SRF at a later date when SRF funds
are available.  Projects receiving SRF refinancing must comply with the

                                 Page 19

reauirementa applicable to projects funded by SRF loans (see Section E and
Appendix B).  Further, where the original debt was  in the form of a
multi-purpose bond incurred for purposes in addition to waatewater
treatment facility construction, an SRF may provide refinancing only for
eligible purposes, and 40: for  the entire d^bt.

         b . Guarantees and Insurance
      Aa Stir o»7 .guarantee or buy  insurance for local debt obligations
w&ere such action would  improve credit market access or reduce  interest
rates.  Because guarantees and insurance may involve the expenditure of
funds without a return stream, their use will reduce the future purchasing
2 owe r of. •: a e 3SF *

         c. Leveraging
             aa  in  the SRF may also be "leveraged,"  i.e., used as a  source
of revenue or security for the paymenc of principal  tnd  interest on
revenue or general  obligation bonds issued by  the State  if  the proceeds  of
"lie AS.II: ox  jucii bonds ira deposited  in  the SRF.  Resources  include  all
assets of an SRF,  including the existing balance  in  the  SRF  at any point
In 7. ime , and. luxure revBnues franv loan repayments.   Tie  £cate aay
to borrow against  the repayment stredm frum outstaadinj  loans made
initial set  of capitalization grants  or  part of  the  capitalization grant
or S:a:c match,  thus making available significant amounts of money much
sooner than would  otherwise be possible.  Each State must comply with  all
of its securities  laws and regulations,  as well  as with  those of the
Federal government.  The bonds may be issued by  an instrumentality of  the
State, the State agency responsible for  administering  the SRF, or an
interstate agency  to which two or more States  have delegated such
responsibili ty-
                                  Page  20

     The State match  cannot  come  from future  proceeds  of  a  leveraging
 iction  that  is dependant  on  a  reserve  account  funded  from the
 Capitalization grant.  The  intent  of  the  State match  requirement  is to
 ihcw vhe State's willingness  to  invest  in the  SRF and  to  provide  an
Absolute increase  in  the  resources  available  to  th«  SRF,   Further,  a
 capitalization £rant  payment  is  not  available  for use  by  a  State  until the
 .iia's has  ahown  that  each match  payment will  be made  and  has made &t least
 the  first  quarter's payment  into  ;h«  SRF-

         d.  Sub-State Revolving  Funds

       An  SRF can  provide loan guarantees  for  similar  revolving funds
 established  by municipal  -r  ratsrmunicipa1  agencies.   EPA intends to delay
 implementing this  provision  until  there exists  sufficient eip^r^snca witii
 State-level  revolving funds  to provide  a  basis  for considering sub-State
 revolving  funds.

         e. Administrative Expenses

      Aa previously ioted, SPA intends  to  allow States to use  section
 ?.05(g.1  funds and SRF  administrative  funds  for  coordinated admini a t r -a.': 'i on
 of  *.he  Fund  and  the construction  grants program.   Theas  expenses  siay not;
 exceed  four  percent of the State'j  combined jaar= or  tie  -iutiior i za c i ons*
 under Titles II  and VI.

      The  eligible administrative  costs for SRF  administration include all
 costs similarly  eligible  under section 205(g)  for management  of the
 construction grants program:   and  under the SRF  program costs  of  servicing
 loans and  issuing  debt,  SRF  program start-up  costs,  financial, management,
 and  legal  consulting  fees, and reimbursement  costs for support services
 from other State agencies.   However,  the  SRF  administrative allowance
 cannot  be  charged with the  costs  of  administering permit  programs under
                                  Page  21

sections 402 and 404 and Statewide waste  treatment cznageraent  planning
programs under section 208(b)(4), or any  other  section  106  activities.

         f. Earn Interest

      An SRF may earn interest-on fund  accounts,  subject  to the
r tqa.i i sraeata "or ^pecli * laua  irpsadi sure  of  Federal  grant  funds  and
Federal and State arbitrage  limits.

         g  Assistance for the  Non-Federal Share

      If a project is receiving a Federal construction  grant  it  may not
receive a loan for the non-retierai aiiars  a£  ';h.e project':!, cost.   However.,
other forms of financial assistance, such as  loan guarantees,  may be
provided to that project only  if  the Governor determines  that  the
municipality faces severe financial  constraints and  the  assistance is
necessary to allow the project  *c proceed.

      C. Notice of Intent to Use Title  II Allotments for  SRF Programs

      T. f i Stats wishes  to use  a  portion  of  its construction grant
allotment untie r- .section  205  of  * he-Ac.:  a.a . A  cap i.ta i i zs. t i on. 7 ran', :. is
Governor must file a notice  of  the State's  intent with  the  Regional
Administrator.  In order to  use fiscal  year  1987  construction  grant
allotments for this purpose,  the Notice of  Intent must  be  received no
later than May S, 1987.  In  order to use  available  allotments  in
subsequent fiscal years, the  notice must  be  filed no later  than  90 days
before the first day of  those  fiscal years.   In fiscal  year 1987, up to  50
percent of the State's allotment may be deposited in its  SRF,  and up to  75
percent may be deposited for  fiscal  year  1988.  Funds  set-aside  under
section 205(j) cannot be deposited into the  SRF.
                                  Page  22

      The notice of intent requirement is not intended to bind the State
to a declared course of action.  Instead, it will enable EPA to aim.: s.i 3». e r
the SRF program more efficiently, particularly in its early years.
Because the deadline for filing a notice of intent for any fiscal year
could pass before EPA issues interim final tulss, and because a State's
legal and budgsc circumstances may remain unclear until after the 90 day
isadAAne, the Agency is advising States to submit the notice as specified
above with th« aasurancs :iat ti« noeicj amj be amended or withdrawn.
la d.t t s.:mia ing :i« porr.ioa of the allotment the State wishes to transfer
lor deposit in its SRF, it should consider the effect of set-asides.

      D. Capitalization Grant Application and Agreement

      Prior to receiving capitalization grant fu.sds , the Region-di
Administrator and the State should reach an understanding on how the State
will administer SRF activities and the role of EPA in the program.

      EPA is conjidering an umbrella concept whereby thess usdsrstand ings
and activities would be incorporated in a State-EPA Water Pollution
Caatrol Revolving Fund Operating Agreement (OA) which could be in effect
for multiple years, and which would be aiiailar to other Sta*s-E?A
igr e aaient a .  Sines activities on construction grant projects will continue
for the nezt i'ew years, the OA may incorporate or cits by refcrenca
applicable portions of the existing State delegation agreement.  Once the
terms of the OA are agreed upon, the State's subsequent applications for
capitalization grants may contain only the information needed to support
the annual application--for example the intended use plan, a negotiated
payment schedule and annual State certifications.

      Among the topics that could be addressed in the OA are:  the goals
and objectives of the SRF; the responsibilities and the relationships of
the State organizations involved in the total wastewater treatment
facility construction program; the manner in which projects will be
                                 Page 23

selected for funding (using priority lists and intended use plans) and
administered through construction, completion and full repayment; the
content and frequency of intended use plans; the State's method for
accounting for obligations and disbursements, the application of State and
Federal regulations and procedures; (e.g., progress toward meeting
enforceable requirements, occ.); reporting; EPA capitalization grant and
paymeas jjroesdniTaa: the nature and scope of technical assistance,
information agreements, auditing and oversight activities. Annual :•.:por-.
requirement*,  And other topics.

     Although  an Operating Agreement may contain many of the items in a
Capitalization Agreement, for each fiscal year, a Capitalization Grant
Agreement must: be entered into betTvesc. the Administrator and the State
before funds can be awarded from Title VI appropriations and from Title II
under the section 205(m) option.  A.State may apply for a capitalization
grant by submitting to the Regional Administrator the standard application
form S? 5700-31 and a draft ajreement and intended use plan (the intended
use plan is described in detail in Section E).  Beginning with fiscal year
1989, EPA must receive the application no later than 90 days prior to the
end of tie second tiacai year after appropriation.  The Regional
Administrator  should take action on the application within 45 days of
i v»; a i p t .

      Section  602 and 603 of the Act clearly set forth specific conditions
that must be included in this agreement:

         1. SRF - An Instrumentality of the State

      Each State must establish that it has created an SRF as an
instrumentality of the State which complies with the requirements and
objectives of  the Act.
                                 Page 24

         2. Payment Schedule

      A payment schedule, established jointly between the Regional
Administrator and the State in accordance with the State's  intended use
plan, must be included with th: capitalization grant agreement.  For  each
irant, the law requires that Federal payments must be made  in quarterly
installments and completed no later than eight quarters after'the date the
State, first obligated such funds or twelvs quarters after the funds were
allotted to the State, whichever is earlier.  The payment schedule
negotiation should also take into account the loan c otnmi cme n.' s  that an SRF
has made or is expected to make, the factors effecting the  pace of
construction within the State, the amount of funds already  available  but
?,ot -zpended by the SRF, and the timing and amount of various borrowing
needs of municipalities, States and the Federal gova rnsaeac .

         3. State Match

      The State must agree to satisfy the 20 percent match  requirement on
or before the date the State receives the grant payment according to  the
negotiated schedule.  The report to the Senate bill provides that the
match requirements can be satisfied by deposits iaxo * seuicatad Stars.
revolving fund. ia. fiscal years prior to -the fiscal year that Federal
capitalization granc funds are received.  ct-ite funds 'a a;  we r s ciepa s i. : ad
into a dedicated State Revolving Fund after March 7, 1985,  which is the
date this legislation began Congressional consideration, can be used  to
satisfy match requirements.  EPA ia examining the Act to determir.; whether
the match requirement can be satisfied from loan repayments .or  interest,
particularly those from loans made from State deposits into  the SRF in
excess of the match.
                                 Page 25

         4. Comri tmsnts for 130 Percent In One Year

      The State must agree to enter into binding commitments  to provide
financial assistance from the SRF in an amount equal to 120 percent of
each quarterly grant payment (the Federal grant and  cite State's ma: en) not
later than one year after receipt of each payment.   If a State enters  into
binding commitments greater than the 120 percent requirement,  the  excess
balance may be credited towards a subsequent quar vet's r squi r siaas, r. .  _;_ay
SRF funds committed fcr use, including funds T>i*c«d  in a reserve  account
for guarantees for local projects funds used to purchase insurance  and
funds used for administration, can be cited as meeting the 120 percent
binding commitment requirement.  Binding commitments are legal
obiijatiaaa,  raeagai;sd ^j Stats law, that define, terms and timing  for
transferring  SRF assets to a recipient of financial  assistance.

     The intended use plan (described in Section E) must identify
sufficient potential recipients of financial assistance to satisfy  this
requirement.   The actual commitment made must be documented in the Annual
Report.  In addition, any negotiated interim reporting may be met  by
updating- *£8  intended isc plan.  Tie intended, uaa nlaa. d.oes not bind the
State.  Substitutes and modifications to provisions  in the original plan
siuat, howevur. be vipiained in tie Annual Heporx, isd ; o c 3. i c ojaci ::r=3: s on
the amount, timing and type of assistance must be met.  Only  changes c^a-
are so significant as to constitute a change to the  program for which  the
grant was awarded will require review and approval by EPA.
         5. Conditions Applying to All Funds

     Generally, the funds  in an SRF may be used  to provide  financial
assistance for (l) the construction of publicly  owned  treatment woris  as
defined in section 212 of  the Act; (2) the implementation of_ nonpoint
source management programs established under  section 319 of the Act;  and,
                                 Page 26

(3) the development and implementation of estuary conservation and
management plans under section 320 of the Act, subject to certain
conditions in the 1987 Amendments which are explained in the following
sections.  Projects :o rsc^ive financial assistance from the SRF must
appear on the State's priority list developed under section 216 and
discussed further in the next section.
      The Stits auat tjtee to expend all of the funds in its SRF in a
timely and expeditious manner as defined in the intended use plan and
capitalization grant agreement and as constrained by the applicable Tax
Acts.  In order to effectuate the Congressional intent to speed needed
construction, EPA is alao considering requiring States to agree to expend
funds within one year of the date a binding commitment was made.  This
requirement applies to the capitalization grant payments, deposits made
under section 205(m) , the State match and any other State contributions,
including the proceeds of leveraging or other use of the monies and,
ultimately, loan repayments.  Deposits into reserve accounts for
guaranteeing a local issue and the purchase of insurance are considered
^.tpendi tur e s . as are loan awards.  However, securing a State bond issue
with Federal grant money is not considered an expend i 'cur e .  Ti; in:;ndid
'aae plan .aus *. include assurances »nd specific proposals for meeting this
requi r ement .

      Projects and programs to receive financial assistance must be
consistent with plans, if any, developed under sections 205(j), 208,
303(e), 319 and 320.

         6. Funds as a Result of Capitalization Grants --
              First Use for Enforceable Requirements
                                 Page 27

     All funds in the SRF "as a result of Federal capitalization grants
(e.g., capitalization grants, the State match, interest and repayments
from loans made from those grants, and leveraging proceeds, but not
p r o v i e d j 5 T 021 State monies in excess of the match) must first be used to
assure maintenance of progress toward compliance with the enforceable
deadlines, goals, and requirements of the Clean Wa^er Act.  The
eaf oieeao is 7<-;qui rsment s of the Act include the municipal compliance
deadline of July 1, 1988.  The Conference Hsport accompanying the 1937
Amendments explains that this first use requirement is met if the
treatment works in a State are on enforceable schedules to achieve
compliance with effluent limitations, whether or not there is a commitment
to fund such treatment works from a State revolving loan fund or with a
Title II grant.  Thus, if »il treatment -vorks (as defined la section 212
of the Act) in a State are on enforceable schedules and thereby
maintaining progress toward compliance with, for example, the 1983
municipal deadline, the State may use its SRF funds resulting from
capitalization gxan-ca for any treatment works project on the State's
priority list, or for eligible programs or projects other than treatment
works (i.e., programs or projects identified under the Nonpoint Source
Pollution Control Program (jection 319) or the National Estuaries Program
    -: ion. 320)) .
     A project is maintaining progress toward compliance  if durizg  tie
term of the Intended Use Plan it  is not in significant non-compliance or
is on an enforceable schedule.  An enforceable schedule  is an NPDES
permit, a judicial order, an administrative order, or a  State order  that
has been recognized by EPA as having the equivalent enf or c eab i 1 i ty  of an
order issued under section 309.

     At any given time there could be facilities  in a State not
maintaining compliance.  In order to avoid impeding the  SRF ' s ability to
expend available funds in a timely manner, EPA is considering a  provision
    sby the Regional Administrator may be permitted to accept a  State's

                                  Page 28

isaurance that a facility not maintaining progress toward compliance and
enable to proceed regardless of funding commitments will be br.ughc onto
in enforceable schedule by a specified date.  If such an assurance could
;e made, that facility could possibly be considered as maintaining
3rogress toward compliance.

     Funds in the SRF not as a result of capitalization grants are not
subject to this requirement.  These monies may be used 4; aay rims for  ?.is
construction of any treatment work* on ciie State's priority list, for  the
implementation of management programs established under section 319, or
for development and implementation of conservation and management plans
under section 320.  The use of the funds for section 319 and 320 programs
need not be  on the priority list but must be described in the intended  use
plan.  The Governor retains the discretion to use up to 20 percent of  the
State's allotment to fund previously eligible projects as provided in  40
-fTv. Subpart  I 35.2015.

         7.  Funds Directly Made Available from Capitalization Grants --
              Title II Requirements

     The Stats must certify to the Regional Administrator that ail
proiec'3 finances!, ia whole or i.a part, from funds auciiorirad before
fiscal year  1995 which are "directly made available™ by capitalisation
grants under Title VI and section 205(m) of the Act, will meet the
requirements listed below in the same manner as projects receiving grants
under Title  II.  These requirements are not imposed on projects funded
wholly from the State match nor to monies repaid to the fund, but do apply
to projects  funded by the portion of the proceeds of leveraging which  is
equivalent to the capitalization grant when that grant is used for
leveraging purposes.  This is referred to as the "equivalency
requirement."  Those Title II requirements can be shown to be met by
identifying  in the Ist-aded Use Plan projects whose total eligible costs
squal or eiceed the grant amount.  Eligible costs are defined in section

                                 Page 29

20l(g)(l), which permits funding otherwise ineligible categories (sections
20l(g)(l) »nd 211) from the 20 percent Governor's discretionary account.
Any projects cited as having eligible costs that help to meet the
equivalency requirement must AIJO jucijfj *i.s other requirements listed

     If.» project receives a ioaa of at leu a-. 50% of it.i tcr.ii eligible
costs, tie total eligible costs of the project can be credited toward
satisfying the equivalency requirement of that grant and any excess
eligible costs can be offset against subsequent grants.  The content of
the Intended Use Plan is described in more detail in the following

         The applicable Title  II requirements are:
         Sect! on 201 Cb") . -which requires that projects apply best
         practicable waste treatment technology Case *0 C7R,

         Secti on 201 ( g") C1 ) f which limits assistance  *o projects :or
         .-secondary treatment,  advanced treatment., ar iny cost-effective
         alternative, new  interceptors dad appur tenanc 2 a..  irni
         infiltration-inflow correction (this section retains the
         Governor's  discretionary set-aside by which a State can
         use up  to 20 percent  of its allotment  for  other projects within
         the definition of treatment works in section 212(2). and  for
         certain non-point source control and groundwater  protection
         purposes, as defined  in sections 319 and 320 of the Act and
         subsequent  Agency regulations (see 40  CFR,

         Section 2Ql(£)(2)f which requires that alternative -technologies
         be  considered  in  project design  (see 40 CFS 3S.20'30):
                                  Page  30

Section 2QlfgK3J. which  requires  the  applicant  to  show that
the related sewer collection  system  is not  subject  to
excessive  infiltration  (see 40 CFR,  35 .2030(b)(4) and  35.2120);
Sect ion 201 f gKS) . which  requires  that applicants study
innovative and alternative treatment technologies and  take
into account oppor tuai c i es to 12:4 £i mars  « JfT I c i 33: uses  of
energy aad resources  (see 40 CFR,  35.2030);

See t ion 201 ( g ) ( 6 1 . which  requires  that the  applicant analyze  the
potential  recreation  and  open space  opportunities in the
     isg 3i the proposed  facility  (see 40 CFR  35 . 2030(b) ( 5) ;
Section 201 f n.K O . which provides  that funds under  section  205
may be used for water quality problems due  to discharges
of combined sewer overflows, which are not  otherwise  eligible,
if such discharges are a major priority  in  a State  (see 40  CFR
35.20l5(B)(2)(iv) and 35.2024(a);

Section 201 ( a 1 . which calls on the Admini s t r a t or  to  is.ccu.rage
:iad Assist c anznun i : i a a in  r.jie deve i opine at cf cani'al  financing
plans ;

Section 2Q4Ca1Cl) and (_2 ) , which require that treatment works
projects be included in plans developed  under sections 208
and 303(e) (see 40 CFR 35.2023);

Sgc t i on 2Q4Cta') ( 1 ) . which requires  communities to  develop  user
charge systems  and to have the legal, institutional, managerial,
and financial  capability to construct, operate, and maintain
the treatment works (see 40 CFR 35.2208, 35.2130, 35.2140,  and
                        Page 31

         Section 2Q4fd')(2'). which, requires that, one year after  the date
         of construction, the owner/operator of the treatment works must
         xertify that the facility meets design specifications and
         «ffluent. 1imi cationj it-iudid  i_:  :-, 3 permit (see 40 CFR

         Section 1\\ , wn:-,l provides  thai  collectors are act eligible,
         uader the Governor's 20 percent discretionary authority of
         20l(g)(l), unless the collector is needed  to assure the total
         integrity of the treatment works  or that adequate capacity exists
         »t the facility (see 40 CFR  35.2015(b)(2)); (Note that  the 1987
         Amendments extend the prohibition for funding separate  storm
         •ewers through fiscal year 1990).

         Section 2 1 8 r which assures that treatment  systems are cost-
         effective and requires that  projects of over $10 million
         include a value-engineering  review (see 40 CFR 35 . 2030Cb)(3 ) and

         Section Sll(cHl). which applies  the Natioae.1 Environmental
         Policy Act  co ireatmeat woria  projects (.-jee 40 CFR 35.2113); as.d ,

         Section 51 1, which applies Davis-Bacon labor wage provisions
         to t r e a tme nt works construction (see 40 CFR 30.603(a).

Appendix B -- illustrates the eligibility  concepts  of Title VI and section

     The Act places  the responsibility  for demonstracing compliance with
these requirements on the State, which must establish "to the satisfaction
of the Administrator that" (section 602(b)) the eligible treatment works
have met the requirements "in the same manner as treatment -works
                                 Page 32

constructed frith assistance under Title II" of the Act (section
602(b)(6)).  This language, along with language in the Conference Repor;
to the effect that States need only "demonstrate" compliance with'the
enumerated requirements, suggests three possible approaches to assuring

     - the State would adopt and apply the applicable construction grant
       regulations and procedures taat imp 1 me 2: tb.£.ie itatu:.-:--
       requi rement s;

     - the State would apply the construction grant regulations, but
       would be'permitted to adopt its own streamlined procedures which
       *r? more  appropriirs to projects financed by loans; or,

     - the State would develop its own regulations and procedures to
       implement the  statutory language.

      Presently, EPA favors the second approach which is a more reasonable
interpretation of the language of the Act and of Congressional intent and
it tie approach  that  would allow the earliest award of capitalization
grants under guidance.  This option would also mosx iffsctively accomplish.
•:he  CTVO gouia of aciisviag compliance ^vi'ih the Act's r squi r -meat s and
providing States with the flexibility needed r.o operate iJie progr-^..

     There are a number of laws and directives from other executive
agencies, in addition to those contained in Suoparc C of EPA'a regulations
implementing the National Environmental Policy Act (40 CFR Part 6),  that
have traditionally applied to projects that receive Federal funds.   EPA
does not intend  to apply, for example, the Federal procurement policy and
similar authorities attaching to Federally funded projects.  However,
there are a number of "cross-cutting" statutes which apply by  their  own
terms, whether or not a project receives direct Federal financial
assistance.  Notable among these laws is Title VI of the C.ivil Rights Ac:
                                 Page 33

of 1964.   It is clear from the legislative history of the Civil Rights Ace
that Congress intended for its non-discrimination provisions to apply
broadly to any Federally assisted construction project, and this
interpretation of its application *M3 beva uphsid by the court.  Several
oiLci li~a pertaining to discrimination and patterned after Title VI of
the Civil Rights Act may also apply.

     Appendix C lists most of the laws and other requirements which  the
»T/»TCV is evaluating to determine whether, and to what extent  they apply
to projects funded by an SRF.  The Agency will provide guidance to States
and recipients of SRF assistance explaining their responsibilities with
regard to these authorities and others which may need to be evaluated.

         8. Set-Aside from Title VI Allotments

      Title VI provides for only one set-aside.  Each year, a  State must
reserve one percent of its allotment or $100.000, wai.chever ia gn
carry out planning under sections 205(j) and 303(e).
er ,
         9.  State Laws and Procedures

      The 3 cat a oiuat igr«e- ': o aaaure 'Chat \f. will follow i ;; 2 own.  laws  and.
procedures applicable to revenue commitment or expenditure.  This
requirement  may be satisfied by certification by an auditing body of  the
State that the SRF's procedures are established so as to comply with  the
State's laws and procedures and generally accepted accounting principles.

        10.  State Accounting and Auditing Procedures

      Aa a Federal grant recipient the State must follow the accounting
and auditing provisions in EPA's General Grant Regulations (40 CFR Part
30).  The Agency expects that these regulations will satisfy the
r squi rasiest 3 of. Tlsie- VI.  Tha State niua t ifrrss ?o *atabli3h aouropriate
                                 Page 34

fiscal and reporting procedures for the SRF.  The State is required to
maintain accounts for payments received by the fund, disbursements mad? by
the fund, and fund balances at the beginning and end of the accounting
period.  The accounting period will be the Federal fiscal year  (October 1
to September 30) unless other annual reporting periods are established  in
the Capitalization Grant Agreement.

     At least 'once a year, the Admiai * < ra~;sr -/ill conduct, or will
require the Siice to have independently conducted, an audit of  the fiscal
vitiation of the SRF.  The State may designate an independent auditor of
the State to carry out the audit or may contractually procure the service.
An "independent auditor"  is a State or local government auditor who meets
the Independence standards specified in generally accepted government
auditing standards.  The Regional Administrator may arrange for 3.2. EPA
audit if the State fails  to conduct the audit or if the State's review  is
otherwise unsatisfactory.  The audit must be submitted to the Regional
Administrator within 180 days of the end of the fiscal year for which it
was conducted.   State conducted audits may be done in conjunction with  the
single Audit Act (see Office of Management and Budget Circular A-128).
EPA will 
         11. Recipient Accounting and Auditing Procedures

      As a condition of making a loan or other forms of assistance
described in section 603(d) , the State must require recipients  to maintain
nroject accounts in accordance with generally accepted government
accounting standards (e.g., Standards for Audit of Governmental
Organizations, Programs, Ac : i 7 i • 1 .»3 and Functions. 1981, also known  as  the
"Yellow Book" and "Governmental Accounting and Financ-ial Reporting
Principles",. National Council on Government Accountings Statement  1, March

         12. Environmental Review Requirements.

      As noted in Section 7, section Sll(c)(l) requires the Governor  to
apply a NEPA-like review to projects constructed with funds directly made
available by capitalization grants.  However, section 602(a) of  the Act
gives the Administrator the author!cy to include conditions in
capitalization grant agreements in  addition to those specified  in  section
602(b).  Based on this authority, EPA plans to require each State  to
assure, prior to receiving  capitalization grant funds, that ill  cr-raiaen:
•srori.3 ?.o BB ccmaxr'uc t ad ia -vhois or in part with funds provided  from the
State'a revolving i'unu ^vi 1 i bs jubj'jg': ••: c .1 >TE?A-cype rsviaw and  :o
systematic, interdisciplinary environmental review procedures to  evaluate
the possible environmental  impacts  (including secondary impacts)
associated with such construction.  Although the primary purpose  of  ths
SRF program in providing funding for the construction of treatment works
is to improve the quality of the environment, this environmental  review
requirement is included because the potential exists for undesirable
environmental side-effects  resulting from inappropriate design  or  siting
of funded treatment facilities, or  from the promotion of uncontrolled
residential, commercial, or industrial development.  In order to  ensure
that  the environmental  improvement  objectives of the SRF program are most
sx'fisc « i v« iy carried ou.t la  perpetuity and are not jeopardi-zed by

                                 Page 36

inadequate considsrat ion of the associated environmental costs, EPA
believes it is essential for States to develop and conduct ecologically
sound environmental reviews.  Like the Federal NEPA process, these reviews
should provide for adequate public involvement.

      States'  comprehensive environmental review programs will be able to
fulfA.ll the above requirement simply by complying with their own program
requirements.   State* iiave the option to use the NEPA process (as
developed under the construction grants program) until such time as the
State's own procedures have been developed and approved by the
Administrator.  These EPA approved NEPA process review procedures must be
in place by fiscal year 1994 in order to be considered eligible for a
capitalization grant in that fiscal year.  Once the State's procedures are
a matter of record, the Administrator's only concern will be to ensure
that the State consistently follows its procedures.

      E- Intended Use Plan, Annual Report

         1.  Intended Use Plan

      A State  must submit an intended use plan 2.3 jarr of its application
•"or a capi : a i i za t i on ^Tuat .  The plan may be- amended upon an agreement
between the State ana che Regional Administrator.  The following
information must be included in each intended use plan:

         a. List of Projects

      A list of the publicly owned wastewater treatment construction
projects on the State's priority list and non-point source and estuary
protection projects eligible for SRF assistance;
                                 Page 37

         b.  Long and Short Term Goals

      A description of the long and short term goals of the State's SRF;

         c.  Information on the Activities -to be Supported

      Information on the activities to be supported by the SRF program,
including a  description of project categories, applicable discharge or
other enforceable requirements, terms of financial assistance, and
comnunities  served;

         d.  Timing and Use of Funds

      Assurances and proposals for meeting the binding commitments,
expeditious  and timely expenditure of funds, maintenance of progress, and
specified Title II requirements of Section 602(b) of the Act;

         e.  Criteria and Method for Distribution of Funds --
              Including Public Comment

      Information on the criteria for distribution of funds.  The State
mua; provide opportunity for public conxnent and review of -:he proposed
intended use plan before submitting it, in final form, to EPA.  Hearings
for priority system and priority list purposes may concurrently satisfy
this requirement; and,

         f.  Interim Reporting Requirements

      The intended use plan can be updated with actual dates to facilitate
any interim reporting negotiated by the Regional Administrator and the
State at the time of capitalization grant award.
                                 Page 38

         2. Annual Report

     A State must submit an annual report, no later than 90 days after the
«sd of the fiscal year, which shall reflect the actual use of
capitalization grant funds.  The report siail upaa:i :he i.-itiaded
plan, identify recipients of "Inancial assistance and include dates of
ioanu, loaa amounts, loan terms, and similar information regarding forms
of financial assistance other than loans.  The annual repot:, ~.h-: I s. t -saded
use plan, and other records the Regional Administrator may reasonably
require,  form the basis of the annual review of each SRF program.  EPA
intends to develop an example report format as guidance.  Appendix D
includes  a sample listing of contents.  EPA anticipates that this
reporting rsqui ~ sraeat -will sad rvirh r.i.s cloa«out of the last project
funded with funds "resulting from the capitalization grant" or the
closeout  of the last capitalization grant, whichever is earlier.  However,
limited information may be required as part of a general Stats report to
EPA as long as tins SRF operates, such as deposits of all repayments into
the SRF,  use only for purpose under 212, 319 and 320. and public revisw
and comment on the operation of the fund.

      F.  EPA's Role - Oversight of Capitalization Grant Conditions

         1. Program Level Review

      The Regional Administrator is responsible for reviewing each State's
compliance with its capitalization grant agreement and the overall
requirements of Title VI.  This review is conducted at the program level.
EPA will  conduct reviews of selected projects at the time of review of the
annual report to assure program compliance.  Projects may be reviewed at
any time  as part of an investigation into allegations of waste,  fraud, or
abuse of  a program grant.

         2.  Information Management

                                 Page 39

      In order to facilitate effective and efficient EPA oversight  of  *. he
SRF program, States will be required to report a limited set of project
level data.  Selected information will be updated on a quarterly  basis and
will u«j d«ed by ZFA to aj«e«« th.» progress of the State in providing
financial assistance to municipalities that result/  in treatment works
construction.  The fo
achieved, oy :n< o3.F.
construction.   The focus of EPA wi11 be on the progress, or result? being
     This information will also be used to facilitate management  of  the
cash flow, or outlays under capitalization grants  in accordance with the
payment schedules negotiated between EPA and the State.

         3. Annual Review and Compi i 
      In making a determination of non-compliance wi ;h the capitalization
grant agreement and devising the corrective action, the Regional
Cdminiitrator -will identify the nature and cause of the State's failure.
the State's corrective action must remedy the specific instance of
ion-compliance and adjust program management to avoid non-compliance in
the future.  Upon request, the Regional Administrator will provid.*
:echnicai aaaijtancc *, o cae Siac-j in -orr ssx ing *.ha tioa-compl iance

      If a State fails to take the necessary corrective action as directed
by the  Regional Administrator within sixty days of receipt of the
-on-comeliance notice, the Regional Administrator shall withhold payment.
to the  SRF until tie S:a:a has taksn the required cor rsc -c i v« -icjtioc.
Once the State takes the corrective action deemed necessary and adequate
"y the  Regional Administrator, the withheld payments ahall be released and
scheduled payments shall recommence-

      If a State fails to take the necessary .corrective action deemed
adequate by the Regional Administrator within twelve months of receipt of
th? original  notice, any withheld payments shall be acoc 1 i gat ed ^-zd
realiotsii Co  other States.

         4. Recovery of Funds

     As a recipient of a Federal grant, the State is required to
safeguard the capitalization grant or section 205(m) funds from waste,
fraud,  and abuse.  If the Regional Administrator determines that
capitalization grant funds or funds resulting from the capitalization
grant were subjected to waste, fraud, or abuse, the capitalization grant
oi scctian 205(m) funds may be recovered in accordance with procsdures
outlined in 40 CFR Part 30.
                                 Page 41

         5.  Audit

     The findings of the audit may be independent grounds for a
determination of non-compliance.  The audit should support the line items
and the conclusions of the annual report.  If ths audit proves the annual
report incorrect, the report should be reviewed Again in terms of the
v-id't findings.   If this second review z'inds the State in non-compliance,
the procedure outlined above will b« implemented.
                                 Page 42

                             ACTIVlYItt (ftYATK)

                   INTENDED U8t
                      EVALUATION AMD
           M view OP
                              ANNUAL  OPERATIONS
            ANNUAL ACTUAL
                              XAVION GRANT
                      LOANS UADC TO
                                                         ~4f   flCFATMCNTI

                    CONDITIONS ON THE USE OF FUNDS



I     Secondary
II    Uor6 Stringent
IIIA  Interceptors
IV6   InfIMration/Inflow
Governor's 20X Discretionary

                                                  Coffipl lance

eg, proceeds
cf leveraging
with state

                             APPENDIX C
          (Authorities in existence as of February, 1981)
Archeological and Historic Preservatign Act of 1974, ?L 93-291
Clean Air Act, PL 95-95
Clean Water Act, PL 92-500, as amended
Coastal Zone Management Act of 1972, PL 92-583, as amended
Executive Order 11593, Protection and Enhancement of the Cultural
Executive Order 11988, Floodplain Management
Executive Order 11990, Protection of Wetlands
Executive Order 12114, Environmental Effects Abroad of Major
Federal Actions
Pish and Wildlife Coordination Act, PL 85-624, as amended
Marine Protection, Research, and Sanctuaries Act of 1972
PL 92-532, as amended
National Environmental Policy Act of 1363, PL 30-150, .is amended.
Maticnal Historic Preservation Act of 1966, PL 89-665, as amended
Noise Control Act of 1972, PL 92-574, as amended
Resource Conservation and Recovery Act, PL 94-580
Rivers and Harbors Act of 1899
Safe Drinking Water Act, PL 92-523, as amended
Toxic Substances Control Act, PL 94-469
Water Resources Planning Act, PL89-80, as amended
Wild and Scenic Rivers Act, PL 90-542, as amended


Appalachian Regional Development Act, PL 90-103'

Contract Work Hours and Safety Standards Act, PL 87-581

Davis-Bacon Act, 46 Stat. 14994, as amended

Demonstration Cities and Metropolitan Development Act of 1966,
PL 39-754, as amended

Executive Order 11738, Administration of the Clean Air Act and the
Federal Water Pollution Control Act with Respect to Federal
•   tracts, Grants, or Loans

Local Public Works Capital Developmenst and Investment Act of 1976,
PL 94-369, as amended
National Community Development Prcgr^nj, ?L 32-333, PL 35-557

National Flood Insurance Program, PL 90-448, PL 93-234

Public Works and Economic Development Act of 1965, PL 89-136


Age Discrimination Act, PL 94-135

Civil Sights Act c-f. 1364, 71.93-352

Sxecutive Order 11246, Equal Employment Opportunity

Executive Orders 11625 and 12138, Women1* a and Minority Business

Rehabilitation Act of 1973, PL 93-112  (including Executive Orders
11914 and 11250)


Copeland (Anti-Kickback) Act

Intergovernmental Cooperation Act of 1968, PL 90-557

Regulatory Flexibility Act, PL 96-354

Uniform Relocation and Real Property Acquisition Policies Act of
1970, PL 91-646


     The Annual  Report  shall  describe  how the State  has  met  the goals  and
)bjectives for  the  previous  fiscal  year as identified in  the  Intended Use
Jlan.  The Annual Report shall include  the same  information  in the
intended Use  Plan,  updated to  reflect actual  loan  activities,  dates,  and a
itatement of  accounts.   In addition,  the  Annual  Report  must  answer the
following questions:

    a. Has the SRF been established in accordance/with Section 603 of  the

    b. Have  all  grant payments been deposited directly into  the decLiCi-ed.

    c. Has the State satisfied its match requirement on  or  before the
       date  of deposit  of the Federal  payment?

    d. Has the State made binding  loan commitments equal to  120% of the
       grant payment *mount within one year  of  receipt of each quarterly

    e. Have  all  funds in the  SRF been  committed in an  expeditious and
       timely  manner?

    f, Have  all  the  projects  funded (in  whole or  in  part by  funds made
       directly  available by  the capitalization grants)  met  tha
       specified requirements that apply to  a project  that  received a
       grant under Title II?

    g. Has the first priority for  use  of funds  rnade  available as a result
       of the  capitalization  grant gens  to projects  to assure aiainicensr.cs
       of progress iovard compliance with the enforceable requirements of
       ins Clean tfatar  Ac*  (including  the municipal  ccmpiianca deadline)?

    h. Has the SRF committed  or  expended the grant payments  received in
       accordance  with  the  applicable  State  laws  and procedures?

    i. Are accounting,  auditing, and fiscal  procedures in accordance with
       generally accepted government auditing standards  (GAGAS) and
       generally accepted accounting principles (GAAP)?

    j. Has the SRF required loan recipients  to  maintain  project accounts
       in accordance with generally accepted accounting  principles?

    k. Has the State made annual reports to  the Regional Administrator on
       the actual  use of the  SRF?


1)  Notice of Intent to
    Regional Administrator (RA)

2)  Appropriation available for
    grant awards to States

3)  Application to RA (includes
    Intended Use Plan)
4)  Complete Capitalization Grant
    Agreement (including negotiated
    payment 3Chsdule)

5)  Payments to State
6)  Deposit 20% State Match into

7)  Binding commitments for an
    amount etruai to each quarterly
    payment plus State match

3}  Intaresu. payments-from leans
9)  Principal repayments to the
10) Submit Annual Report to EPA
11) RA completes annual review;
    compliance letter (if any)
    to State

May 5, 1987, then 90 days prior
to each succeeding fiscal year.

During the fiscal year appropriated
and the following fiscal year.

As soon as possible, but no later
than (NLT) 90 days prior to the
end of the second fiscal year of
an appropriation.

NLT 45 days after receipt of
complete application
No more frequently than quarterly,
for the earliest of 12 quarters
from allotment, or 8 quarters from
the first obligation by the State.

No later than date of receipt of
each payment.

Within one year of receipt for each
quarterly payment.
\t discretion 01 State, but all
vithin 20 years ai'tar projact-
completion of construction.

At least annually, commencing one
year after completion of
construction, fully amortized not
later than 20 years after
completion of construction.

NLT 90 days 'after the end of the
fiscal year.

NLT 45 days after receipt of
Annual Report.
12) Submit- annual audit -to
NLT 180 days after the end of the
fiscal year.

13) Final  review of  annual  audit;      NLT 90  days  after receipt of
   compliance  letter  (if any)         annual  audit.
   to State