Program
Operations
Manual
Provisional Edition
United States Environmental
Protection Agency
The Office of Ground Water
and Drinking Water
Infrastructure Branch
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Drinking Water State Revolving Fund
Program Operations Manual
Provisional Edition
United States Environmental Protection Agency
The Office of Ground Water and Drinking Water
Infrastructure Branch
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Table of Contents
Chapter 1 - Introduction
1.1. Statutory Background 2
1.2 DWSRF Regulations 3
1.3 Program Oversight 3
Chapter 2 - Steps in the Federal DWSRF Funding Process
2.1 The President's Budget Request 6
2.2 Congressional Appropriations 6
2.3 OMB Apportionment 8
2.4 Allotment to States 8
Chapter 3 - Steps in the Federal DWSRF Project Funding Cycle
3.1 State Develops the Federal Capitalization Grant Application 10
3.2 EPA Review of the Capitalization Grant Application 15
3.3 Withholding DWSRF Funds Available 16
3.4 State Agrees to Provide Matching Funds 19
3.5 State Leveraging Activities to Increase Funds Available 21
3.6 Fund Transfers (Between the DWSRF and CWSRF Programs) 24
3.7 Federal Funding Process 26
3.8 Special Program Assistance Requirements 27
3.9 Cooperation and Coordination with other Programs 28
3.10 Project Application Process 30
3.11 Detailed State Loan Application Review 37
3.12 Project Approval and General Loan Closing Procedures 43
3.13 Construction Activities and Loan Disbursement 48
3.14 Project Completion and Close-Out 52
Chapter 4 - Funding through the DWSRF Set-Asides
4.1 Four Types of Set-Asides 53
4.2 Key Requirements and Recommendations 55
Chapter 5 - State Follow-Up Activities
5.1 State Develops the DWSRF Annual/Biennial Report 58
5.2 State Completes and Submits the DWSRF Annual Audit to EPA 60
5.3 Submitting Annual Set-Aside Performance Status Reports 63
5.4 Reporting for DWNIMS 64
Chapter 6 - EPA Oversight Activities
6.1 State and EPA Annual Review Process 66
6.2 EPA Regional Review Process 67
Chapter 7 - Revisiting the Program Structure
7.1 Assessing Implications of Fund Management Decisions 69
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Acronyms
ACH Automated Clearing House
AG Attorney General
ASAP Automated Standard Application for Payments
CE Categorical Exclusion
CFR Code of Federal Regulations
CWSRF Clean Water State Revolving Fund
DWNIMS Drinking Water National Information Management System
DWSRF Drinking Water State Revolving Fund
EA Environmental Assessment
EIS Environmental Impact Statement
EPA Environmental Protection Agency
FCTR Federal Cash Transaction Report
FSR Financial Status Report
FTE Fulltime Equivalence
FY Fiscal Year
GAAP Generally Accepted Accounting Procedures
GAGAS Generally Accepted Auditing Standards
GAO Government Accountability Office
GO General Obligation
IUP Intended Use Plan
MBE Minority Business Enterprise
NEPA National Environmental Policy Act
OA Operating Agreement
OIG Office of Inspector General
OMB Office of Management and Budget
PAM Program Activity Measure
PART Program Assessment Rating Tool
PER Program Evaluation Report
PPL Project Priority List
PWS Public Water System
PWSS Public Water System Supervision
SDWA Safe Drinking Water Act
SERP State Environmental Review Process
SRF State Revolving Fund
SWP Source Water Protection
TFM Technical, Financial, and Managerial
WBE Women's Business Enterprise
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CHAPTER
1
Introduction
KEY POINTS IN CHAPTER 1
• Created through the 1996 Amendments to SDWA, the
DWSRF program is a multifaceted tool for states to use in
achieving public health protection.
• DWSRF programs must follow all requirements as set
forth under the DWSRF Interim Final Rule, the DWSRF
Program Guidelines, and EPA's general grant regulations
at 40 CFR Part 31.
• EPA, the Office of Management and Budget, the
Government Accountability Office, and Congress
conduct varying levels of DWSRF oversight activities to
ensure compliance and effective program management.
1.1
Statutory Background
1.1.1
Development of the Safe Drinking Water Act
Congress passed the Safe Drinking Water Act (SDWA)
in 1974 and amended it in 1986 and 1996 to protect
public health by regulating the nation's public drinking
water supply. Under SDWA authority, the United States
Environmental Protection Agency (EPA) establishes
national health-based standards for drinking water that
protect against a wide range of contaminants, and ir
provides national leadership in implementing a suite of
programs designed to protect water supplies and ensure
the sound operation of water systems. Drinking water
standards set either enforceable maximum levels of indi-
vidual contaminants in drinking water or required ways
to treat water to remove contaminants. EPA, state gov-
ernments, and water systems work together to make
sure that these standards are met.
1.1.2
The Role of the Drinking Water
State Revolving Fund (DWSRF)
The 1996 Amendments to SDWA, Section 1452, creat-
ed the DWSRF program. The DWSRF is a multifac-
eted tool for states to use in achieving the public health
protection objectives of SDWA. States operate their
own DWSRF programs and receive annual capitaliza-
tion grants from EPA which they use to support low-
interest loans and other types of assistance to public
water systems. Additional provisions also allow state
DWSRF programs to target extra assistance to those
communities with the greatest economic need. (See
Section 3.8.1 for additional information on providing
assistance to small and disadvantaged communities.)
The state agency that establishes DWSRF assistance pri-
orities and carries out program oversight activities is the
same state agency that also administers the Public
Water System Supervision (PWSS) program. The
PWSS program carries out many key activities, includ-
ing developing and maintaining drinking water regula-
tions, tracking compliance information, and ensuring
that all public water systems follow state regulations.
States may entrust day-to-day operations and financial
management of their DWSRF program to another
agency such as a finance authority as long as priority
setting and program oversight responsibilities remain
with the PWSS program
Examples of Key PWSS Program Activities:
• Developing state drinking water regulations;
• Maintaining an inventory of public water systems;
• Conducting sanitary surveys of public water systems;
• Providing technical assistance to PWS operators; and
• Ensuring all systems comply with state requirements.
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DWSRF Priorities
DWSRF funds are used to ensure:
• Public health protection,
• Compliance with drinking water standards, and
• Affordable access to drinking water.
The 1996 Amendments extended the safe drinking water
framework of public health, compliance, and affordability
to encompass Source Water Protection (SWP), operator
training, technical assistance, and public education. The
DWSRF program design reflects this source-to-tap
approach. States can set aside a portion of their capital-
ization grants to fund activities that improve the manage-
ment of water systems and establish or expand programs
that protect sources of drinking water. Some DWSRF
funds can also be used to help states support the imple-
mentation of PWSS program activities. DWSRF funding
for these purposes is contingent upon efforts to improve
and maintain system capacity. Although DWSRF set-
aside funds may be used to administer the state PWSS
program, there is a federal limitation on the use of set-
aside funds for enforcement activities.
1.2
DWSRF Regulations
1.2.1
DWSRF Interim Final Rule
Issued in August 2000, the DWSRF Interim Final Rule
codifies the DWSRF Program Final Guidelines (1997)
and explains various program requirements, including:
steps to receiving a capitalization grant; what states may
do with capitalization grant funds intended for infra-
structure projects; what states may do with funds intend-
ed for set-aside activities; and the roles of the states and
EPA in managing and administering the DWSRF pro-
gram. The rule gives states significant flexibility to
design their DWSRF programs and to direct funding
toward their most pressing compliance and public
health-related needs.
EPA attempted to include all major program require-
ments, including items required by SDWA and those
EPA considers necessary for effective program manage-
ment. The rule modifies and adds to the Final
Guidelines based on policies that evolved during the first
few years of DWSRF implementation and from com-
ments provided on a first draft of the rule by a work-
group of State Revolving Fund practitioners.
1.2.2
General Grant Regulations
The Interim Final Rule supplements EPA's general
grant regulations at 40 CFR Part 31 which contain
administrative requirements that apply to governmental
recipients of EPA grants and subgrants. With the
exception of requirements for the participation of
minority and women's business enterprises1, EPA's gen-
eral grant regulations at 40 CFR Part 31 do not apply
to recipients of loans and other types of assistance from
a state DWSRF program Fund. Instead, these general
grant regulations apply to state agency recipients of
DWSRF capitalization grants. These general grant reg-
ulations describe the planning activities and forms
required to apply for a grant, the acceptable financial
administration of grant funds, the appropriate methods
for changes and subawards, the monitoring of program
activities, reporting requirements, records retention,
enforcement procedures, and post-grant requirements.
Guidelines for conducting audits are also included.
1.3
Program Oversight
1.3.1
DWSRF Circle of Accountability
EPA DWSRF program conditions and reporting
requirements provide EPA with a summary of individual
state program activities. Information used by EPA
includes the Intended Use Plan, the Biennial Report,
program files, financial records, the capitalization grant
application, set-aside work plans, capitalization grant
award conditions, the annual audit, and reports provid-
ed through the Drinking Water National Information
Management System (DWNIMS). This information, in
combination with Annual Reviews of state programs and
the development of state Program Evaluation Reports
(PERs), provides EPA insight into state use of funds and
helps guide management and administration decisions.
1 Each DWSRF program is required to develop a fair share goal for the participation
of minority and women's business enterprises in receiving DWSRF project assistance.
Just as the DWSRF program is required to make progress in meeting these fair share
goals, SRF loan recipients of assistance in an amount equal to the capitalization
grant are also required to follow a standard procedure to ensure compliance in this
area. (Please see Section 3.11.3 for more information.)
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1
Capitalization
Grant
Application
Capitalization
Grant Award
and Conditions
DWSRF Circle of Accountability
Additionally, Congress and multiple agencies oversee
DWSRF program operations in order to ensure efficien-
cy, effective implementation, and management in order
to best serve the public interest. These different over-
sight components act to further increase accountability
by conducting audits and investigations of DWSRF pro-
gram policies and administration. These oversight activ-
ities are then used to guide funding decisions and pro-
gram management policies.
1.3.2
EPA Office of Inspector General
The EPA Office of Inspector General (OIG) is an inde-
pendent office within the EPA. It consists of analysts,
auditors, and investigators, among others. Its purpose
is to help the EPA and its programs, including the
DWSRF, operate more efficiently and to detect and pre-
vent waste, fraud, and abuse. To accomplish this, it per-
forms audits, evaluations, and investigations. It also
provides public liaison and hotline services to review
public complaints about EPA programs and activities.
EPA Office of Inspector General
• Helps EPA programs operate more efficiently
• Performs audits, evaluations, and investigations
• Evaluates possible cases of waste, fraud, and abuse
1.3.3
Office of Management and Budget
The Office of Management and Budget (OMB) over-
sees the preparation of the federal budget and supervis-
es its administration in Executive Branch agencies,
including the EPA. OMB evaluates the effectiveness of
programs, policies, and procedures of these agencies,
including the DWSRF, with the goals of improving
administrative management, developing better perform-
ance measures and coordinating mechanisms, and
reducing unnecessary burdens on the public.
Office of Management and Budget
• Oversees the administration of the federal budget
• Evaluates the effectiveness of programs
• Leads the development of government policy
1.3.4
Government Accountability Office
The Government Accountability Office (GAO) helps
Congress oversee federal programs and operations,
including the DWSRF, in order to ensure that they are
serving the public interest. The agency consists of ana-
lysts, auditors, lawyers, economists, information tech-
nology specialists, and many others with the purpose of
enhancing the economy, efficiency, credibility, and
effectiveness of the federal government. In accordance
with this purpose, GAO conducts financial audits, pro-
gram reviews, legal support, and policy analyses, and
investigations. For example, in 2001, GAO released a
report to Congress entitled, Water Infrastructure:
Information on Federal and State Financial Assistance
to provide information on assistance from state and fed-
eral agencies for drinking water and wastewater capital
improvements since 1991.
Government Accountability Office
• Assists Congress in overseeing federal programs
• Conducts financial audits, program reviews, policy analyses,
and investigations
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1.3.5
Congress
Congress oversees EPA's administration of the DWSRF
to review and monitor the Agency's performance, pro-
gram success, and effects of policy implementation under
SDWA. The goal is to determine whether the laws and
the programs created by Congress are implemented and
carried out in accordance with the intent of Congress.
The Senate Environment and Public Works Committee
(Subcommittee on Fisheries, Wildlife, and Water) and the
House Energy and Commerce Committee
(Subcommittee on Environment and Hazardous
Materials) are the authorizing committees for SDWA and
thus monitor the impact of the legislation they initiate.
The Senate Appropriation Subcommittee on Interior and
related Agencies and the House Appropriations
Subcommittee on Interior, Environment, and Related
Agencies develop the annual legislation appropriating
funds to EPA for DWSRF capitalization grants each year.
They are interested in how the money is spent.
Every three to five years, the authorizing committees are
obligated to review and study how EPA administers
SDWA, including its application, administration, execu-
tion, and effectiveness. This includes the organization
and operation of EPA. It also includes the impact of tax
policies on SDWA and the DWSRF programs in particu-
lar. The appropriations committees examine the
DWSRF annually, but not in the same detail as the
authorizing committees.
The Drinking Water
State Revolving
Fund: Financing
America's Drinking
Water
The Congressional committees, and sometimes individ-
ual Representatives and Senators, will request reports
and other information from EPA that describe program
performance. For example, in 2003, EPA issued The
Drinking Water State Revolving Fund Program:
Financing America's Drinking Water from the Source
to the Tap, Report to Congress. Such reports and
additional information help Congress ensure that EPA
can effectively manage and carry out program objec-
tives, help judge whether executive policies reflect the
public interest, and build a knowledge base for future
legislation.
Congress
• Oversees EPA's administration of the DWSRF
• Reviews and monitors the Agency's performance
• Every three to five years, the authorizing committees are
obligated to review and study how EPA administers SDWA
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KEY RESPONSIBILITIES: CHAPTER ONE
DWSRF Regulations and Program Oversight
EPA
• EPA, OMB, GAO, and Congress are charged with overseeing DWSRF program operations in order to ensure
compliance, efficiency, and effective implementation of program activities.
State Program Office
• The state agency that establishes DWSRF assistance priorities and carries out program oversight activities must be
the same agency that that also administers the PWSS program. This agency is termed the primacy agency.
• All DWSRF programs are subject to certain program conditions and reporting requirements as set forth under
the DWSRF Interim Final Rule, the DWSRF Program Guidelines, and EPA's general grant regulations at 40
CFR Part 31. For example the program office is charged with developing the Intended Use Plan, the DWSRF
Annual/Biennial Report, and annual program audit.
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CHAPTER
Steps in the Federal DWSRF Funding Process
KEY POINTS IN CHAPTER 2
• To help guide budget decisions OMB uses PART to
assess the purpose, management, and performance of
individual programs, including the DWSRF.
• House and Senate Budget Committees hold hearings to
discuss the President's Budget and gather expert testimo-
ny from federal agencies, including EPA.
• The passage of an appropriations bill and its signing into
law permits a federal agency to make payments from the
federal Treasury for specified program purposes, includ-
ing the DWSRF.
• EPA allots DWSRF funds to states according to a formula
that reflects proportional drinking water infrastructure
needs.
2.1
The President's Budget Request
2.1.1
Development of the President's Budget
Each year, the President's Budget request is received by
Congress on or before the first Monday in February.
This schedule is set according to requirements under
the Congressional Budget Act of 1974. The President's
Budget contains details on the Administration's policies
and funding priorities for the upcoming fiscal year. The
Budget includes information on spending estimates by
category, revenue and borrowing levels, and input from
the various federal agencies. (For more information and
access to the annual federal budget and related informa-
tion, see http://www.whitehouse.gov/omb/budget.)
To help guide budget decisions, OMB uses the Program
Assessment Rating Tool (PART). PART is a series of
questions that seek to assess the purpose, management,
strategic planning, and performance of individual pro-
grams, including the DWSRF. Programs must demon-
strate that their purpose is clear, that they are results-ori-
ented, that they are well managed, and that they achieve
intended results. The purpose of PART is to improve
the performance and management of federal programs.
Its evaluation of program effectiveness also plays a role
during the development of the President's Budget by
providing relevant information for allocating limited
funds to programs that can best demonstrate success.
Possible ratings include "effective," "moderately effec-
tive," "adequate," "ineffective," and "results not demon-
strated." The DWSRF has received a rating of "ade-
quate." (For detailed information on the PART process,
see http//www.whitehouse.gov/omb/part/.)
The Purpose of OMB's Part Analysis .
to improve the performance and
management of federal programs
According to the President's Budget, the DWSRF falls
under Budget Function 300, also known as funding for
Natural Resources and the Environment. This budget
category encompasses several funding areas, including
the development and maintenance of our national water
resources and the management of our drinking water
and wastewater infrastructure systems.
2.2
Congressional Appropriation
2.2.1
Congress Presents the Final Budget Resolution
After the President's Budget request is submitted to
Congress, both the House and Senate Budget
Committees hold hearings to discuss the budget and
gather expert testimony and advice from the various fed-
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eral agencies, including EPA. For example, in May of
2005, the EPA Administrator appeared before the Senate
Appropriations Committee to discuss the President's
Budget for FY2006.2 During this process, individual
Members of the Budget Committees can offer amend-
ments and make other suggestions for change before a
final version of the budget is presented. According to the
Budget Act, Congress is required to present a final ver-
sion of the House and Senate budget resolutions -
termed the concurrent resolution - by April 15th of each
year. This deadline is rarely met in practice. This budget
sets an overall framework for all appropriations bills con-
sidered before Congress. (For more information on this
topic, see http://www.house.gov/ budget/ and
http://budget.senate.gov/.)
2.2.2
Congress Considers Multiple
Appropriations Bills
Annually, Congress considers multiple appropriations
bills. It is important to note that annual appropriations
bills will change from year-to-year. For 2006, the
House included eleven appropriations bills. The
Drinking Water SRF is included under the Interior and
Environment appropriations bill. Others included:
Agriculture; Defense; Science, State, Justice, and
Commerce; Energy and Water; Foreign Operations;
Homeland Security; Interior and Environment; Labor,
Health and Human Services, and Education; Legislative
Branch; Military Quality of Life and Veterans Affairs;
and Transportation, Treasury, HUD, Judiciary, and the
District of Columbia.
Similarly, the Senate included the Drinking Water SRF
program under the Interior appropriations bill. Other
bills in 2006 included: Agriculture; Commerce, Justice,
and Science; Defense; the District of Columbia; Energy
and Water; State/Foreign Operations; Homeland
Security; Interior; Labor, Health and Human Services,
and Education; Legislative Branch; Military and Veterans
Affairs; and Transportation, Treasury, Judiciary, and
HUD.
The passage of an appropriations bill and its signing into
law by the President permits a federal agency to make
2 For access to EPA testimony statements before the House and Senate Committees,
see http://www.epa.gov/ocirpage/hearings/index.htm.
payments from the Federal Treasury for incurred obli-
gations and other specified purposes. Appropriations
provide a formal approval for the expenditure of public
funds for a specified purpose over a set period of time.
2.2.3
Congress Approves Individual
Appropriations Bills
Appropriations bills are considered by both the House
and Senate Appropriations Committees. Individual
bills are divided among each Committee's respective
subcommittees depending on the specific area of federal
funding. Each subcommittee works to develop their
individual appropriations bill according to the original
Presidential Budget request, new priorities, and the
previous appropriations bills. After each subcommittee
develops their final recommendation, all appropriations
bills are amended as necessary and approved by the full
House and Senate Appropriations Committees. (For a
listing of current membership on subcommittees
charged with consideration of program appropriations
for the national DWSRF program, see the House and
Senate Appropriations websites at http://appropriations.
house.gov/ and http://appropriations.senate.gov/.)
Following approval of their respective appropriations bills,
the House and Senate each appoint conferees (i.e., nego-
tiators) to reconcile differences between their respective
versions of these appropriations bills. House and Senate
conferees group to form an ad hoc panel known as the
Conference Committee to develop one version for each
appropriations bill that can receive support from at least
half of the appointed conferees and can pass both the
House and the Senate by a majority vote. (For more
information on the appropriations bills approval process
and to track individual bills, visit
http://thomas.loc.gov/. This website provides legisla-
tive information from the Library of Congress.)
2.2.4
Rescission
Congress may apply a rescission (an across the board
reduction to an appropriation) before final passage of
that appropriation. This practice has been common in
recent years. Rescissions are a tool the appropriations
committees use to keep the total amount of appropria-
tions within agreed upon spending caps. After a final
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appropriations bill is approved, readjustments to the bill
are still possible under certain circumstances.
Authorized under the authority of the Budget Act of
1974, the President may request readjustments to the
previously appropriated budget amounts through the
introduction of a rescission bill. A rescission bill speci-
fies the exact amount of change to all or part of a previ-
ously appropriated amount. If the President's rescission
bill is not passed by Congress within forty-five days,
funds must be released according to the original appro-
priated amounts. For example, in an attempt to offset
costs associated with Hurricane Katrina, a rescission bill
was introduced for FY2006 that withdrew funds previ-
ously appropriated, including funds previously appropri-
ated to EPA. The proposal rescinded $166 million from
the EPA State and Tribal Assistance Grants program.
2.3
OMB Apportionment
2.3.1
Purpose
Based on appropriations bills signed into law by the
President, OMB develops an apportionment spending
plan. An apportionment plan is intended to achieve the
most effective and economical use of funds made available
by a federal appropriation. The process of apportioning
distributes funds appropriated for specific purposes by time
period of availability and proper oversight agency.
2.4
Allotment to States
2.4.1
National Set-Asides
Before funds appropriated for the DWSRF are allotted
to states, EPA is required to reserve some of the funds
for specific national-level set-asides. Indian Tribes and
Alaska Native Villages can receive grants valued up to
1.5 percent of annually appropriated funds. EPA may
also reserve up to two percent of appropriated funds for
small system technical assistance.
In addition, EPA reserves $2 million for the monitoring
of unregulated drinking water contaminants. From
FY1999 to FY2003, EPA reserved funds to provide
grants to states for reimbursement of the costs of train-
ing and certifying operators of drinking water systems
serving 3,300 persons or fewer (known as the Operator
Certification Expense Reimbursement Grant Program
and authorized under the provisions of Section 1419 of
SDWA, as amended). Separate EPA guidelines govern
the management of these national-level set-asides.
National Set-Asides
• 1.5 percent for grants to Indian Tribves and Alaska
Native Villages
• Up to two percent for small system technical assistance
• $10 million for health effects research
• $2 million for monitoring unregulated contaminants
• Cost reimbursement for operator training certification
2.4.2
Basis of Allotment
After national set-asides are reserved from the full feder-
al appropriation, remaining funds are allotted to state
DWSRF programs, the District of Columbia, and the
Pacific Island Territories to carry out Section 1452 of
SDWA.
EPA allots federal DWSRF funds to the states according
to a formula that reflects their proportional share of
needs identified in the most recent Drinking Water
Infrastructure Needs Survey. Drinking Water
Infrastructure Needs Surveys are due to Congress every
four years starting from the January 1997 survey. Of
note, state costs for participation in the Needs Survey
may be charged to the four percent DWSRF adminis-
tration set-aside. (See Section 4.1.1 for more informa-
tion on the four percent DWSRF administration set-
aside.) No state or Puerto Rico receives less than one
percent of the total funds available for allotment to all
the states (withholding notwithstanding).
In addition to funds allotted for individual state pro-
grams, the District of Columbia receives a one percent
share of total allotted funds, while the Virgin Islands
and the Pacific Island Territories together receive an
allotment of 0.33 percent.
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Funds are available to states during the fiscal year in
which they are authorized and during the following fis-
cal year. Any amount not obligated at the end of this
period is reallotted (according to the same formula) to
all remaining states that have already obligated their
funds. EPA may reserve up to ten percent of the funds
available for reallotment to provide additional assistance
to Indian tribes.
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General Steps in the Federal Funding Process
Congress Presents a Final Budget Resolution
President's Budget Request is Submitted to Congress
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Congress Considers Multiple Appropriations Bills
Appropriations Bills Amended as Necessary and Approved
Final Passage of Appropriations Bills
OMB Develops Apportionment Spending Plans
based on Final Appropriations Bills
Congress May Consider
Rescissions to Approved
Appropriations Bills
EPA Allots Federal DWSRF Funds to States Following
the Application of National Set-Asides
Figure: General steps in the federal funding process from the President's budget request to EPA allotment of funds to the individual
DWSRF programs.
KEY RESPONSIBILITIES: CHAPTER TWO
Steps in the Federal DWSRF Funding Process
EPA
• For every program assessed through the PART process, OMB and associated federal agencies develop plans to
improve performance and management over time. All assessed programs are held accountable to the recommen-
dations contained within these plans, including the national DWSRF program and EPA.
• After the President's Budget request is submitted to Congress, both the House and Senate Budget Committees
hold hearings to discuss the budget and gather expert testimony from the various federal agencies, including EPA.
• Before funds appropriated for the DWSRF are allotted to states, EPA is required to reserve some of the funds for
specific national-level set-asides.
• EPA allots federal DWSRF funds to the states according to a formula that reflects their proportional share of
needs identified in the most recent Drinking Water Infrastructure Needs Survey.
State Program Office
• EPA allots federal DWSRF funds to the states according to a formula that reflects their proportional share of
drinking water needs. Funds are available to the states during the fiscal year in which they are authorized and
during the following fiscal year. Any amount not obligated at the end of this period is reallotted to all remaining
states that have already obligated their funds.
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CHAPTER
Steps in the DWSRF Project Funding Cycle
KEY POINTS IN CHAPTER 3
• In order for a state to receive the DWSRF funds
allotted to it, the state must submit a complete
capitalization grant application.
• The IUP is the focal point of the capitalization
grant application. It lays out how the DWSRF
program will employ all of its available funds.
• EPA will withhold a portion of a DWSRF's capitalization
grant if certain SDWA requirements are not met.
• States must provide a match to the Fund equal
to or greater than twenty percent of the
capitalization grant.
• States can "leverage" capitalization funds to provide a
higher level of assistance in the near term.
• A state may transfer an amount equal to thirty-three
percent of the DWSRF capitalization grant between the
CWSRF to the DWSRF programs.
• Programs must follow formal requirements for making
loans and approving project applications.
• Programs must adhere to certain project requirements
and formal construction oversight procedures.
3.1
State Develops the Federal
Capitalization Grant Application
In order for a state to receive the DWSRF funds allotted
to it, the state must apply for a grant of the funds. This
capitalization grant application must conform to general
federal grant regulations (40 CFR Part 31 - Uniform
Administrative Requirements for Grants and Cooperative
Agreements to State and Local Governments); 40 CFR
Part 35, Subpart L - Drinking Water State Revolving
Funds; EPA's Interim Final Rule for the DWSRF; and
Section 1452 of SDWA, as amended. (For more infor-
mation on EPA grantee requirements, including
required EPA grantee forms, visit the EPA Office of
Grants and Debarment at http://www.epa.gov/ogd.)
Components of the formal capitalization grant applica-
tion include:
• EPA Form 424, "Application for Federal Assistance,"
and related forms,
• The state's Annual Intended Use Plan (IUP), includ-
ing the state's Project Priority List, and
• State Attorney General certification that the authori-
ties establishing the DWSRF are consistent with state
law and that the state may legally bind itself to the
terms of the capitalization grant agreement
Some states submit set-aside work plans along with
their capitalization grant application, but they are not
required for the capitalization grant application. If not
submitted with the capitalization grant application, they
are submitted based on a schedule negotiated with
EPA. (For more information about set-aside work plan
requirements, see Section 3.1.5.)
Capitalization Grant Application . . .
states should submit grant applications no
later than ninety days prior to the end of
the period of funds availability.
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3.1.1
Operating Agreements
An Operating Agreement (OA) is an optional document
that describes the objectives, structure, and procedures
of a DWSRF program that remain the same from year-
to-year. An OA outlines how the State Revolving Fund
(SRF) will conduct business and comply with the basic
tenets of the program, including schedules for review by
and reporting to EPA. Almost all DWSRF programs
function under an OA.
The OA stands in for several portions of the capitaliza-
tion grant application and agreement. It can include
most of the assurances and requirements, as noted
above. EPA and the state must agree to the OA provi-
sions and to any changes therein. Changes can occur
without a formal grant amendment, and the state and
EPA can give the OA a termination date. With an OA
in place, subsequent capitalization grant applications will
mainly consist of the IUP.
3.1.2
Compliance with Federal Regulations
Administering Agency Authority and Responsibility. The
state attorney general must certify and document that the
state and administering agency(ies) can enter into a capi-
talization grant agreement, accept funds from the EPA,
and operate the DWSRF program in accordance with
SDWA. The agency that prioritizes assistance and over-
sees DWSRF operations must also be the primacy agency
for the state's PWSS program. Documentation of the
roles and responsibilities for each administering agency
must be included with the application. The state must
demonstrate that it has the personnel and resources to
manage the DWSRF program. Also necessary are assur-
ances for compliance with all state statutes and regulations
regarding DWSRF funds and for compliance with applica-
ble federal crosscutters (See Section 3.11.3 for more
information on federal crosscutters).
"The agency that prioritizes assistance
and oversees DWSRF operations must
also be the primacy agency for the state's
PWSS program."
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Funds Management. Each DWSRF program must
agree to the negotiated payment schedule and to the
legislative requirements for use of the funds. The capi-
talization grant must be deposited into the Fund and in
separate accounts for set-aside activities, as detailed in
the application. A twenty percent match to the capital-
ization grant and a one hundred percent match for the
State Program Management set-aside are required.3
(See Section 3.4 for more information on DWSRF set-
asides and matching funds.) Interest earnings, loan
repayments (except for loan repayments through the
DWSRF set-asides for land acquisition and SWP activi-
ties - see Section 4.2.1), and, where applicable, net
bond proceeds must be credited to the Fund. In turn,
the Fund can be used for new loans or security for
SRF-issued bonds. States must also provide assurances
that fiscal controls and accounting systems will be con-
sistent with the Generally Accepted Accounting
Principles (GAAP) and that yearly Fund and set-aside
account audits will conform to the Generally Accepted
Governmental Auditing Standards (GAGAS).
Use of DWSRF funds must follow the program's IUP,
as submitted with the capitalization grant application,
and established DWSRF set-aside work plans (see
Section 3.1.5 for more information on developing
DWSRF set-aside work plans). States also need to have
evaluation systems and policies in place that assure each
borrower's ability to repay their loans. Timely and
expeditious use of funds (i.e., committing and expend-
ing funds quickly and efficiently) is an additional
requirement. Every other year, each DWSRF program
must submit a Biennial Report to EPA detailing the
uses of the Fund and set-aside accounts, including
audited financial statements. Although the reporting
3 The one-hundred percent match for expenditures through the State Program
Management set-aside may be met through cash, in-kind services, and program
credits according to formal policies (see Section 3.4 for more information.)
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requirement calls for biennial reports, many states have
decided that it is necessary and appropriate to generate
annual reports for submission to EPA and for internal
reporting purposes. For example, several states generate
annual reports because they are required by the state
legislature.
3.1.3
General Content of the Intended Use Plan
The IUP is the focal point of the capitalization grant
application and agreement. It lays out how the DWSRF
program will employ all of its available funds, including:
• federal capitalization grants,
• state matching funds,
• loan repayments,
• Fund interest earnings,
• loan fees, and
• bond proceeds deposited into the Fund
States may submit a two-part IUP, one part for set-
asides and another for the Fund itself. The whole or
each part must undergo public review to meet the
requirements set forth through the DWSRF Interim
Final Rule. The DWSRF program must describe the
review process and its response to major comments and
concerns. An IUP is required as long as the Fund or
set-aside accounts remain in operation, irrespective of
continued federal funding. Changes to the use of funds
from what is stated in the IUP are permitted, but sub-
stantive changes must undergo public review. lUPs are
approved by the State's EPA Region.
Intended Use Plan (IUP)
Required contents include:
• Short and long-term program goals
• Summary of the DWSRF accounts
• Set-aside and disadvantaged community budgeting
• Project priority list and ranking methodology
• Discussion of the public review process
Program Goals. The state must present short- and long-
term goals for their DWSRF program. The short-term
goals should address the upcoming year's activities and
the long-term goals should communicate how the state is
maximizing program effectiveness and how program
objectives support national goals set forth through
SDWA.
According to EPA's Strategic Plan, the Agency is dedi-
cated to protecting human health by reducing exposure
to contaminants in drinking water, including protecting
source waters. According to the most recent EPA
Strategic Plan (September, 2006 proposal), the follow-
ing draft strategic targets are highlighted:
• By 2011, ninety percent of community water systems
will provide drinking water that meets all applicable
health-based drinking water standards throughout the
year. (2005 baseline: Eighty-nine percent)
• By 2011, eighty-six percent of the population in
Indian country served by community water systems
will receive drinking water that meets all applicable
health-based drinking water standards throughout the
year. (2005 baseline: Eighty-six percent)
• By 2011, minimized risk to public health through
SWP will be achieved for fifty percent of community
water systems and for an associated sixty-two percent
of the population served by community water sys-
tems. (2005 baseline: Twenty percent of community
water systems; twenty-eight percent of population)
• By 2015, in coordination with other federal agencies,
reduce by fifty percent the number of homes on tribal
lands lacking access to safe drinking water. (2003
baseline: Indian Health Service data indicate that
twelve percent of homes on tribal lands lack access to
safe drinking water)
Through goals and objectives developed by national
DWSRF programs, states have the opportunity and
responsibility to contribute to meeting the national
goals of EPA's Strategic Plan. As described through
this plan, EPA's National Water Program is responsible
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for assessing the performance of individual programs,
including the DWSRF, and EPA regions on a continu-
ing basis to ensure progress in meeting national objec-
tives. DWSRF programs are encouraged to continue
positive efforts to support advancement in meeting
national measures of program accountability.
Status Update. The IUP must also provide a summary
of DWSRF program account balances, the amounts
available for loans, set-aside activities, and subsidies to
disadvantaged communities. This information must
include details for all fund activities and the total
amounts collected through fee accounts. For fees placed
in separate, non-project accounts to pay for program
administration, the state must certify that these funds
will be used only for DWSRF purposes and will be prop-
erly audited.
It is also important that the state document estimated
loan demand, forecasted leveraging, and other factors
that affect financial planning. Transfers to or from the
CWSRF or cross-collateralization with the CWSRF
should be described. (See Section 3.5 and 3.6 for addi-
tional information on cross-collateralization and SRF
fund transfers.)
DWSRF Set-Asides. In addition to accounting for
DWSRF set-aside funds, the IUP must also describe
how these funds will be used, including a general sched-
ule and expected achievements. Additional details, such
as goals and objectives, schedule of deliverables, and
specific evaluation criteria for each set-aside are further
defined through set-aside work plans. According to
national program policy, set-aside work plans are sub-
mitted based on a schedule negotiated with EPA. If no
schedule exists, work plans must be submitted no later
than ninety days after the capitalization grant award.
If a state wishes to reserve the authority to take set-aside
funds from future capitalization grants, they must
include the amount reserved in the annual IUP. States
may reserve the authority for all set-asides except the fif-
teen percent local assistance and other state programs
set-aside. (For more information on developing set-
aside work plans, refer to Section 3.1.5.)
Disadvantaged Community Assistance. States may also
adopt a disadvantaged community program to provide
additional subsidies to disadvantaged communities in
the form of "negative interest rate loans" or "loan prin-
cipal forgiveness." Both of these approaches will
reduce the amount of the original loan principal. IUP
documentation for a state's disadvantaged community
assistance programs also requires well thought out esti-
mates of the types and amounts of disadvantaged assis-
tance for specific projects. A state with such a program
must also include a definition of a disadvantaged com-
munity and a description of affordability criteria that
will determine the level of principal forgiveness. Total
loan subsidies for this program cannot be greater than
30 percent of the same year's capitalization grant and
cannot be banked for use in coming years.
Prioritization and Distribution Methods. DWSRF pro-
grams must state their methods and criteria for distrib-
uting all available funds through their IUP. States must
also describe their overall financial planning process and
note the impact of financial decisions on the long-term
financial health of the Fund.
Questions answered through the IUP may include:
• What is the reasoning behind allocating some assis-
tance to set-asides?
• What are the established criteria and methods for
distributing funds?
• What criteria determine the terms of assistance,
including repayment period and interest rates?
DWSRF programs must present their priority systems
for ranking projects in such a way that is clear to the
public. To the maximum extent practicable, systems
must be structured to prioritize projects that address
the most serious risk to public health, that enable com-
pliance with SDWA, and that have the greatest needs
according to state affordability criteria for the cost of
drinking water per household.
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3.1.4
Purpose and Format of the Project Priority Lists
Any project to be funded must appear on a state
DWSRF comprehensive priority list which is made avail-
able for public review. DWSRF programs must assign
every project a priority and expected funding schedule.
Water system name and service area population must
also accompany each fundable project. In addition, a
project description and expected loan terms for each
proposed assistance agreement must be listed. Once
fundable projects have been identified, they are to be
funded in priority order.
Deviations from the priority list are subject to certain
program requirements including adherence to established
bypass procedures. Any changes to the original funding
order, according to program bypass procedures, must be
explained in the Biennial Report and during the annual
review process. States may bypass projects if they are not
ready to proceed and for other documented reasons. The
highest ranked project on the priority list that is ready to
proceed should always receive next consideration. State
staff should work to prepare these projects for future
funding through the DWSRF program.
EPA strongly encourages states to develop a list of proj-
ects most likely to receive funding in the coming year as a
supporting table which will help to offer perspective and
context to the comprehensive project priority list.
If emergency projects approach the DWSRF for imme-
diate funding, state programs may fund these activities
according to previously established emergency funding
procedures. Emergency projects are those defined as
projects that require immediate attention to protect
public health or other state-defined emergency situa-
tions. All procedures for identifying and accepting an
emergency project for DWSRF program assistance must
be detailed in the IUP.
Along with the priority lists, DWSRF programs must
show how they will provide at least fifteen percent of
assistance to small systems (less than 10,000 people),
according to SDWA requirements. If there is insuffi-
cient demand, the state must describe how it will meet
this requirement in the future. A DWSRF program that
spends more than fifteen percent on small system assis-
tance can bank any excess toward future compliance.
3.1.5
General Content of the DWSRF
Set-Aside Work Plans
In order to draw federal dollars into its set-aside
accounts to support program activities, a DWSRF pro-
gram must first illustrate how it will spend these funds
according to a formal plan. States must submit detailed
annual or multi-year work plans that list the total dollar
amount and percentage of the DWSRF capitalization
grant to be used for set-aside activities. For each set-
aside, states must include specific goals and objectives, a
schedule of outputs and deliverables, and a description
of evaluation criteria for each activity. A description of
specific roles and responsibilities, including third party
contractors, and projected fulltime equivalences (FTEs)
for implementation must be documented. EPA must
approve a state's set-aside work plan before funds are
released for these purposes.
DWSRF programs must submit their work plans on a
schedule established with EPA, or no more than ninety
days after the capitalization grant award. If a state
misses its deadline, the set-aside funds in question are
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transferred back to the Fund for allowable program
uses. Multi-year work plans are an option, but they
must be negotiated with EPA and funds must be
expended within four years. When implementing a
multi-year work plan, states are required to organize
budget details by individual year.
Under the four percent administration and technical
assistance set-aside, a state is only required to submit a
work plan if providing funds for technical assistance to
public water systems. In this event, only the portion
used for technical assistance must be described within
the work plan.
If a state wishes to reserve the authority to take set-aside
funds from future capitalization grants, they do not have
to submit a work plan. Instead, states may reserve the
authority by including this amount in the annual IUP.
States may reserve the authority to take an equivalent
amount from a future capitalization grant for all set-
asides except the fifteen percent local assistance and
other state programs set-aside.
3.1.6
Public Participation and Marketing
Public Participation. The 1996 Amendments to the
Safe Drinking Water Act created a public involvement
requirement that applies to the DWSRF program. As
part of the IUP development process, state programs
must seek "meaningful" public review and comment for
several elements of the IUP:
• The short and long-term goals of the program
• The priority system used to rank projects
• The priority lists of projects, including both the fund-
able and the comprehensive list
• The financial status of the program
• A description of the amounts of funds that the pro-
gram will use for set-aside activities and the intended
use of those funds
While the requirement does not specify what would
constitute meaningful public review, programs typically
meet the requirement if they allow adequate time for
public comment and adequate time for the State to
address and respond to major comments. Examples of
state activities to involve the public include:
Distributing the IUP to a wide audience
Holding public meetings/hearings or participating in
conferences
Publishing newsletters or newspaper notices
Mailing program information to interested parties
Developing Internet websites
Producing public service announcements for radio or
television
Establishing advisory groups to develop and review
policies
Marketing. In order to spread awareness of the
DWSRF and encourage applicants to apply for funding,
some state programs issue newsletters, send mailings,
hold public meetings/conferences, and develop inter-
net websites, among other activities. These activities
are important for attracting new customers, particularly
those in small and rural communities with significant
needs and minimal resources.
3.2
EPA Review of the
Capitalization Grant Application
3.2.1
Review of the State Capitalization
Grant Application
As states develop their capitalization grant application,
they work, as appropriate, with EPA regional staff to
determine IUP format, establish or change OAs, set
deadlines for set-aside work plans, and negotiate pay-
ment schedules. EPA notifies states of any new
requirements, if applicable.
Once a DWSRF program submits its capitalization
grant application, EPA reviews it to ensure that it meets
the requirements of SDWA, EPA grant regulations, and
the DWSRF program regulations. DWSRF staff at
EPA work with the grants administration staff to
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General Steps in Award of State Capitalization Grant
EPA Accepts and Reviews
State Grant Application
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Review Sources and Uses of All DWSRF Funds
Review Prospective Project Outcomes and Outputs
Review Short- and Long-term Goals in IUP
Review Proposed Projects to Determine Eligibility
Review Financial Terms of Assistance
State Capitalization Grant
Application Submitted to EPA
EPA Regions
Provide Guidance
to States
4
9
4
Obtain State Attorney General Certification
Develop IUP and Project Priority List
Complete Application for Federal Assistance
EPA Awards State Capitalization Grant
with Capitalization Grant Agreement
Figure: General steps from development of the grant application,
through EPA review, and awarding of the federal grant.
approve the application and to prepare the state recipi-
ent for the grant award. Every year, these offices review
the IUP to determine that the capitalization grant is
issued for eligible program activities, as authorized
through SDWA. Additional review items include ensur-
ing that the budget is sufficiently detailed, that outputs
and outcomes are sufficiently detailed, and that the pro-
gram has outlined an appropriate plan for expeditious
and timely use of all available funds.
3.2.2
EPA Award of the State Capitalization Grant
The capitalization grant is awarded to the state follow-
ing EPA approval of the grant application. This initiates
a capitalization grant agreement. According to a formal
payment schedule established between EPA and the
grantee, EPA authorizes the state DWSRF program to
draw down federal grant funds for authorized program
activities and loan disbursements. (For more informa-
tion on formal cash draw procedures through the
DWSRF program, see Section 3.12.4.)
3.3
Withholding DWSRF Funds Available
3.3.1
Specific Criteria
Capacity and Authority Withholding*. EPA will withhold
a portion of a DWSRF's capitalization grant if certain
SDWA capacity development requirements are not met.
Twenty percent of funds will be withheld from states
that do not have the legal authority or other means to
ensure that community and nontransient, noncommuni-
ty water systems that began operations after October 1,
1999, demonstrate technical, managerial, and financial
capacity for each drinking water regulation. Twenty
percent withholding will also occur for states that are
not implementing a capacity development strategy,
including adherence to all federal reporting require -
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ments, to help systems gain capacity. (These two with-
holding provisions are not additive. A maximum of only
twenty percent may be withheld for either of these two
violations.) An additional twenty percent may also be
withheld if the state has not adopted and is not imple-
menting a water system operator certification program.
Loss of Primacy. If a state loses primacy (i.e., primary
enforcement authority) under SDWA, EPA will withhold
that state's entire DWSRF capitalization grant. EPA
may use these funds to administer primacy in that state.
The balance of funds not used by EPA to administer pri-
macy will be reallocated to other compliant state
DWSRF programs. A state will be eligible for future
allotments from funds appropriated in the next fiscal
year after primacy is restored.
Reasons for Withholding
Capitalization Grant Funds
No implemented capacity development strategy or
authority to ensure systems demonstrate TFM capacity:
maximum twenty percent withholding
No implemented operator certification program: maxi-
mum twenty percent withholding
Loss of primacy: one-hundred percent withholding
3.3.2
Reallotment of Withheld Funds
Withholding associated with failure to: 1) implement a
capacity development strategy, 2) establish authority
ensuring systems demonstrate TFM capacity, or 3) imple-
ment an operator certification program will be reallotted
to those states that can show current compliance with
those requirements. Redistribution occurs according to
the original allotment formula for all funds in question.
Only states that have obligated all of their allotment for
that period of availability are eligible to receive these
additional monies. The receiving state must describe
how it will spend the funds in its current IUP.
Reallotment of loss-of-primacy DWSRF funds that are
not reserved bv EPA occurs in a similar manner.
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.1-3.3
Development/Acceptance of the Federal Capitalization
Grant Application/Withholding of DWSRF Funds Available
EPA
• Work with each state DWSRF program to make necessary changes to the OA and to negotiate a payment sched-
ule for the capitalization grant.
• Review the capitalization grant application materials, IUP, and set-aside work plans to ensure that funds will go
to eligible projects and that the DWSRF will be managed according to federal requirements.
• Award the DWSRF capitalization grant.
• Determine annually if a withholding is necessary. Withhold the proper amount of DWSRF capitalization grant
funds if a state has not met its capacity development or operator certification program requirements.
• Withhold all funds if a state loses primacy; employ some of these allotted funds to administer primacy in that
state; and reallocate remaining funds to other compliant state DWSRF programs.
• Reallocate withheld allotted funds to other, compliant DWSRF programs according to the current allotment formula.
State Program Office
• Prepare, subject to public review, and submit to EPA an IUP that describes the use of all DWSRF funds and
establishes a priority list of fundable projects in the upcoming fiscal year.
• Complete and submit a capitalization grant application to EPA including the funding application, payment sched-
ule, IUP, and other required documentation, which may involve a revised OA that defines program structure and
operations.
• Develop work plans for EPA that detail how DWSRF set-aside funds will be managed and employed within ninety
days of the grant award, or according to the agreed to schedule between the state program and EPA regional office.
• Coordinate with state PWSS and capacity development programs to remain aware of possible withholdings.
• If relevant, state how the DWSRF will spend reallotted funds in the IUP.
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3.4
State Agrees to Provide Matching Funds
3.4.1
Federal Requirements for
State Match of the Fund
States must provide a match to the Fund equal to or
greater than twenty percent of the entire capitalization
grant. The state must demonstrate that it has the finan-
cial and legal ability to satisfy this match on or before
the date of each grant payment. It is important to note
that other state agencies may not make a loan to the
DWSRF to provide the match; however, they may assist
the DWSRF in acquiring matching funds through an
external debt offering.
A state can issue bonds to provide its match. Revenue
bonds may be issued directly by a DWSRF with bond-
ing authority or through other existing state mecha-
nisms. General Obligation (GO) bonds can also be
repaid with DWSRF revenues. Review of a state match
bond proposal is an important part of the grant award
process. As opposed to bonds for leveraging, bond
issues to fund state match must be repaid only with
interest earnings. In addition to the regional review,
EPA headquarters must approve a state's first-ever state
match bond issue but not subsequent issues with the
same structure.
State Match Requirements . . . Each
state must provide a twenty percent match
for each capitalization grant payment
and a one-to-one match to all grant
monies reserved under the program
management set-aside.
3.4.2
State Match to the Ten Percent
Program Management Set-Aside
In addition to the twenty percent match for the Fund,
DWSRF programs must provide a one-to-one match for
any amount of the capitalization grant, up to ten per-
cent, reserved for the State Program Management set-
aside (see Section 4.1.3 for more information on this
match requirement). Under the DWSRF regulations,
programs are allowed the option of using credit from
state expenditures (match and overmatch) provided to
the PWSS program during FY1993. This credit may
account for up to fifty percent of the match required
under this set-aside. Regulations also allow these
amounts provided by the state to the PWSS program
during FY1993 to serve as a perpetual credit.
Additional match can be in the form of new cash, credit
for in-kind services, or credit for PWSS overmatch
(only) in the current fiscal year. Cash contributions
may come from state appropriations or income generat-
ed through program fees. State funds provided for the
State Program Management set-aside match require-
ment may not also be used to satisfy the match require-
ments under the PWSS program or vice versa. In-kind
services may include state funds used for program man-
agement activities that are directly related to the eligible
uses of the Program Management set-aside, an example
of which is employee salaries.
States are required to identify the source of match for
the State Program Management set-aside in their capi-
talization grant applications, as well as provide docu-
mentation of the actual source of match in their
Annual/Biennial Reports.
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.4
State Agrees to Provide Matching Funds
1
EPA
• Ensure that the state will be able to provide the twenty percent capitalization grant match in accordance with
federal requirements, including restrictions on DWSRF bond issuance to raise state match.
• Review the documentation for the one-to-one match before authorizing use of the State Program Management
set-aside.
State Program Office
• As part of the DWSRF capitalization grant application, demonstrate the ability to provide a match of twenty per-
cent for each capitalization grant payment. Ensure timely deposit of this match according to a formally estab-
lished payment schedule.
• Document a one-to-one match for any State Program Management set-aside funds requested.
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3.5
State Leveraging Activities to
Increase Funds Available
3.5.1
Overview of the Leveraging Planning Process
States can "leverage" capitalization funds, using them as
security for bond issues that allow DWSRF programs to
provide a higher level of assistance in the near term.
DWSRF bonds are highly regarded by the market, keep-
ing states' interest in leveraging high. Several basic
types of leveraging are in use. No two state approaches,
however, are identical.
If a state is considering leveraging, its DWSRF program
should examine its financial assistance needs, both the
demand for assistance and the timing of these needs, and
the role of other funding mechanisms, including local
financing. Financial modeling not only allows program
administrators to compare the supply of funding versus
this demand, but also shows the impact of leveraged pro-
gram structures versus a non-leveraged program. Even if
leveraging looks like a good option financially, state
political acceptability, state policy considerations, rela-
tionships among state agencies, and the ability to admin-
ister a leveraged program might be significant obstacles.
DWSRF programs should consult with EPA when con-
ducting leveraging planning, as regional staff members
have experience reviewing other leveraging programs.
Leveraging Considerations
• Demand for DWSRF financing
• Timing of infrastructure needs
• Role of other funding mechanisms
• Long-term impact on the Fund
• Political acceptance
• Program management capacity
When a DWSRF program decides to leverage, it first has
to establish the responsibilities of state agencies and plan
any needed modifications to SRF enabling legislation, SRF
procedures, or state regulations. This is also the time to
formally initiate contact with the financial community and
to inform EPA and client communities of its plans.
f/EPA
Basic Leveraging Structure
Next, the DWSRF assembles a financial team including
state personnel, bond counsel, underwriters, a trustee,
and a financial advisor. This team designs the leverag-
ing structure and considers the level of state credit sup-
port, loan participants, the type of bond indenture, and
the type of cash flow/account structure. Preliminary
communications with those who will review the state's
approach, including credit rating agencies and EPA,
occur during this development process.
EPA regional DWSRF staff review any leveraging plan
to be sure that it will protect the long-term financial
health of the Fund and that its structure respects the
federal program requirements. Specifically, the net
bond proceeds must be deposited into the Fund.
While no two states have exactly the same leveraging
account structure, a review of state programs shows
that there are two basic forms of leveraging in use in
DWSRF programs: reserve fund leveraging and cash
flow leveraging.
For reserve fund leveraging, the capitalization grant
drawn from the federal treasury is deposited into a debt
service reserve fund as security and a source of earnings
and bond funds are used to make loans for eligible proj-
ects. In cash flow leveraging federal grant funds are lent
out along with bond funds. EPA reviews the leverage
structure for compliance with federal requirements.
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As the program is developed, the state works with
finance industry professionals to develop the trust
indenture, bond resolution, legal opinion form, and
bond certificates. They also write the preliminary offi-
cial statement, bond purchase agreement, and agree-
ment among underwriters. The DWSRF program exe-
cutes loan agreements and interagency agreements. At
this point, the bond issue is ready to present to the rat-
ing agencies and advertise to the market. After all these
steps are complete, the bonds are priced, printed, and
issued. Proceeds from the bond sale are deposited into
the Fund and managed by the trustee.
3.5.2
SRF Cross-Collateralization Procedures
Cross-collateralization allows funds from one state SRF
program to be used to secure the other SRF program
from revenue shortfalls. By supporting DWSRF bonds
with the very strong cash flows of the CWSRF program,
states receive stronger bond ratings that translate into
lower interest rates on their bonds and cost savings to
DWSRF borrowers. In the case of a state where few of
the DWSRF borrowers have strong credit histories,
cross-collateralization can make access to the bond mar-
ket possible.
A state must take several steps to include cross-collater-
alization in its SRF Programs. First, the capitalization
grant agreements for both programs must be amended
and receive an opinion from the Attorney General (AG)
certifying that state law permits cross-collateralization.
In addition, the OA and IUP in both programs must be
amended to detail how cross-collateralization will be
implemented. In particular, the lUPs for both pro-
grams must detail which funds will be used as security,
how monies will be used in the event of a default, and
whether or not monies used for a default in the other
program will be repaid. If it will not be repaid, an
explanation of the cumulative impact on the Funds is
also required. State programs are also required to sub-
mit any amended lUPs for public review and comment.
DWSRF/CWSRF Cross-
Collateralization .. . State DW or
CWSRF bond issues can be used to
support the other SRF program if rev-
enues from the bonds are allocated to the
respective funds in the same portion as
they are used for security for the bonds.
All proceeds generated by the issuance of bonds must
be allocated to the respective CWSRF and DWSRF
Funds in the same portion as they are used for security
for the bonds. States must demonstrate at the time of
bond issuance that the proportionality requirements
have been or will be met. If a default should occur,
and Fund assets from one SRF program are used for
debt service in the other SRF program, the security
would no longer need to be proportional. States may
not combine the assets of the SRF programs as security
for bond issues to acquire state match for either pro-
gram. States are also prohibited from using the assets
of one SRF program to secure match bonds for the
other SRF program. Finally, the debt service reserves
for the DWSRF and CWSRF programs must remain
accounted for separately and loan repayments must be
made to the respective program from which the loan
was made.
It is important to note that cross-collateralization does
not effect the calculation of set-asides, the four percent
administrative ceiling, or binding commitments; howev-
er, payments and cash draw proportionality may be
affected if there are defaults.
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.5
State Leveraging Activities to Increase Funds Available
EPA
• Review a DWSRF program's assistance needs and proposed leveraging structure to ensure that leveraging will
sustain the financial health of the program.
• Examine a state's cross-collateralization plans with regard to their compliance with all DWSRF regulations.
State Program Office
• If drinking water infrastructure funding demand is outpacing a DWSRF's ability to provide financing, consider
leveraging DWSRF funds.
• Assemble a team of program and financial advisors to design a leveraging structure and to plan for and
implement a bond issue.
• Consider cross-collateralization as a way to better secure a bond issuance. This may result in a lower interest
rate and better loan terms to borrowers.
• Obtain EPA approval before implementing proposed leveraging structure.
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3.6
Fund Transfers (Between the DWSRF
and CWSRF Programs)
3.6.1
Specific Criteria
To provide flexibility to use one SRF to support the
other in meeting state funding needs, the 1996 SDWA
Amendments (Section 302) allowed the transfer of
funds between a state's DWSRF and CWSRF program.
Although this initial authorization ended on September
30th, 2001, Congress extended transfer authority on an
ongoing basis through annual EPA appropriations bills.
This transfer provision was later made permanent with
the 2006 appropriations.
According to DWSRF and CWSRF transfer provisions,
a state may transfer an amount equal to thirty-three per-
cent of the DWSRF capitalization grant to the CWSRF
or an equivalent amount from the CWSRF to the
DWSRF. When electing to approve a transfer between
SRF programs, the lUPs and OAs in both programs
should cover the approach and details for SRF fund
transfers. Information on how these transfers will affect
payment schedules, cash draw proportionality, and bind-
ing commitments should also be included. Follow-up
reporting through the state Annual/Biennial Report
should include information on total recorded SRF
transfer activity.
DWSRF/CWSRF Fund Transfers . . .
A state may transfer an amount equal to
thirty-three percent of the CWSRF
capitalization grant to the CWSRF or
an equivalent amount from the CWSRF
to the DWSRF.
Before transferring funds, the state's AG, or someone
designated by the AG, must certify that state law per-
mits such a transfer between the CWSRF and DWSRF
programs. The OA and relevant portions of the
Capitalization Grant Agreement must also be amended
for both programs to detail the specific method the
state will use to transfer the funds. States may transfer
any monies that are in the Fund, including federal capi-
talization grant dollars, state dollars, repayments, and
investment earnings. DWSRF programs may elect to
reserve the authority to transfer funds in one year, but
not actually transfer those funds until some later time.
This approach can help with planning. Funds must be
used for project or set-aside activities during the time
period prior to when the actual transfer occurs. If sun-
set provisions for transfers allow, a state could address
key priorities by accounting for transfers on a net basis
such that it can "loan" funds to its sister program that
would "repay" them with an equivalent transfer at a
later date. Because a transfer occurs after award of a
capitalization grant, it does not affect the calculation of
state match, set-asides, or administration funding levels.
Funds transferred into the DWSRF are considered to
be part of the "available funds credited to the Fund,"
and as such, they are subject to the fifteen percent
small systems provision. Also, DWSRF programs must
account for whether the transferred amount consists of
federal dollars to which federal requirements such as
payment schedules and crosscutters will apply.
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.6
Fund Transfers
EPA
• Review any DWSRF/CWSRF fund transfers in the IUP to ensure that they do not exceed the transfer ceiling.
• Ensure the DWSRF program follows all other requirements for transferred funds, including application of federal
crosscutters and meeting the small systems minimal funding requirement.
• Ensure state programs have the necessary authority to transfer funds between SRFs (e.g., through state AG certi-
fication and appropriate language included in the IUP).
State Program Office
• Obtain necessary authority (e.g., state AG certification) to transfer funds between SRF programs.
• Describe transfer procedures for SRF funds within the OA.
• Document planned transfer activity to or from the CWSRF program in the IUP.
• Provide follow-up reporting on all recorded SRF transfer activity within the Annual/Biennial Report.
• Ensure compliance with all federal requirements for transferred funds, including application of federal crosscut-
ters and providing a minimum level of assistance to small systems.
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3.7
Federal Funding Process
3.7.1
Disbursement from the DWSRF
State programs receive each capitalization grant payment
in the form of an increase in the ceiling of funds avail-
able through the EPA Automated Clearing House
(EPA-ACH). Funds are transferred to the state from
the U.S. Treasury on a reimbursement basis, after assis-
tance recipients have billed the DWSRF program for
work completed and the DWSRF program requests.
After the funds are transferred, the State reimburses the
assistance recipients for costs incurred. This process is
known as the disbursement from the DWSRF
3.7.2
Binding Commitment Requirements
Following a Set Payment Schedule. DWSRF programs
are required to follow a formal schedule when accept-
ing capitalization grant payments. These schedules are
negotiated between individual DWSRF programs and
EPA. A separate schedule is developed for each capital-
ization grant and made final through a formal capital-
ization grant agreement. Schedules are based on each
program's estimated plan for entering into future bind-
ing commitments and expenditures through the
DWSRF set-aside accounts. Both EPA and DWSRF
programs agree to follow these schedules when funding
SRF activities.
It is important to highlight that individual grant pay-
ments are not actual transfers of cash, but instead repre-
sent increases to the Automated Standard Application
for Payments (ASAP) funding ceiling available for SRF
loan disbursements or set-aside expenditures. Increases
in the funds made available track the established pay-
ment schedule.
SRF assistance programs are required to accept all grant
payments within the earlier of eight quarters from the
capitalization grant award or within twelve quarters
from the allotment of federal funds. For example,
under the 8 quarter rule, if payments began in January
of 2000, they would end in December of 2001.
(Reference: 2000 DWSRF Interim Final Rule, Section
35.3560(a) and (b))
Capitalization Grant Payments
Programs MUST accept all capitalization grant payments
the earlier of:
• Eight quarters after the grant award, or
• Twelve quarters after the allotment
Establishing Binding Commitments. After DWSRF pro-
grams accept a federal capitalization grant payment
they are required to enter into binding commitments
for eligible projects within one year. Binding commit-
ments must equal the total amount of each grant pay-
ment, net all set-aside deposits, plus state match. A
binding commitment represents a legal obligation
between a DWSRF program and an assistance recipient.
Such agreements detail all relevant terms of assistance,
including interest rates, payment schedules, and repay-
ment terms. In many states, a binding commitment is
a closed loan; in some states a binding commitment let-
ter is used. If binding commitment letters are used,
EPA monitors the time period between their issuance
and loan closing to assure that funds are being used
expeditiously. If a program enters into binding commit-
ments for an amount greater than the total amount
required, the program may credit any excess toward
future binding commitment requirements.
Binding Commitments
Binding commitments MUST equal:
• Federal payments (net set-aside deposits) PLUS state
match (within one year of payment date)
EPA uses information about binding commitments to
calculate program pace (i.e., executed loan agreements as
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a percentage of total funds available). Total binding com-
mitments (as reported to EPA) are based solely on final
loan agreements, rather than interim loan agreements.
If the binding commitment requirement is not met,
EPA may withhold future grant payments and require
modification of the payment schedule prior to releasing
additional grant payments. If an individual program is
concerned that it will not meet the minimum binding
commitment requirements, program staff should estab-
lish and propose a revised binding commitment schedule
to the EPA Regional Administrator. Any amendments
to the payment schedule affect only future payments.
Although a program may revise its payment schedule, all
remaining payments must be received as originally
required (i.e., within the earlier of eight quarters of the
grant award or twelve quarters from allotment).
(Reference: 2000 DWSRF Interim Final Rule, Section
35.3550(e))
3.8
Special Program Assistance Requirements
3.8.1
Providing Special Program Assistance
Assistance to Small Communities. All state DWSRF pro-
grams are required to provide, to the extent possible, a
minimum of fifteen percent of funds available annually
for loans to small systems. Small systems are defined as
those that serve fewer than 10,000 persons. Total avail-
able funds include capitalization grants deposited to the
Fund, state match, interest earnings, loan repayments,
and bond proceeds. States must consider all of these
sources in a given fiscal year to calculate the required
level of assistance for small systems. Direct assistance to
small systems, as well as the portion dedicated to the
consolidation of a small system with another facility,
qualifies toward this requirement. Programs must detail
the total amounts anticipated for small system assistance
within the IUP and report on the actual use of funds
within the Biennial Report.
If a program anticipates that it will be unable to fulfill
the fifteen percent minimum obligation in the upcom-
ing year, an explanation accounting for the inability to
meet this requirement must be included in the annual
IUP as well as a discussion about program activities that
will ensure the minimum requirement is met in future
years. Activities may include providing technical assis-
tance to small systems, implementing a new marketing
strategy, or conducting other types of outreach efforts.
Small System Assistance. . . programs
must provide a minimum of fifteen
percent of all available loan assistance
to small systems
States are required to meet this fifteen percent mini-
mum level of funding to small systems for as long as
the program is in operation. This fifteen percent mini-
mum requirement is not tied to the award of a capital-
ization grant, but represents a permanent program
condition. (Reference: 2000 DWSRF Interim Final
Rule, Section 35.3525(a)(5))
Assistance to Disadvantaged Communities. DWSRF
programs are given the flexibility to provide additional
loan subsidies to disadvantaged communities. Each
state has the flexibility to establish its own definition of
"disadvantaged communities." To make loans afford-
able for disadvantaged recipients, programs may offer
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subsidies including reduced interest rates, negative inter-
est rates, and extended loan repayment terms (up to thir-
ty years). Alternatively, they may provide a certain level
of principal forgiveness. Programs may provide these
types of subsidies to recipients that currently meet
affordability criteria established by the state or will meet
these criteria as a direct result of receiving DWSRF loan
assistance.
When providing assistance to disadvantaged communi-
ties, programs are limited to a maximum of thirty per-
cent of each capitalization grant deposited to the Fund
for providing loan principal forgiveness subsidies and
negative interest rates. If a state provides less than the
maximum of thirty percent of each capitalization grant
for principal forgiveness or negative interest rates, the
remaining amounts may not be banked for future use.
Programs providing disadvantaged assistance are respon-
sible for developing affordability criteria to define these
types of communities. A "disadvantaged community"
represents the entire service area of a public water sys-
tem that meets such affordability criteria. If desired,
EPA will provide additional information and assistance
to those programs developing these types of affordabili-
ty determinations. Before programs may implement
their system for defining disadvantaged communities,
proposed criteria must first undergo a formal public
review and comment period. EPA reviews and approves
a state's disadvantaged community assistance program as
part of the annual IUP review process.
Disadvantaged Community Assistance
• Disadvantaged community assistance (i.e.,
in the form of negative interest rates or principal
forgiveness) may not exceed thirty percent of each capi-
talization grant.
All subsidy amounts are approved and committed
according to the same schedule established for overall
binding commitments. In other words, all binding
commitments, including commitments for disadvan-
taged community assistance, must be made within one
year of receipt of the associated capitalization grant pay-
ment. Programs are required to identify all projects
receiving this type of assistance, the overall level of sub-
sidy, and the criteria used for awarding assistance to
these systems within their annual IUP. (Reference:
2000 DWSRF Interim Final Rule, Section 35.3520(b))
3.9
Cooperation and Coordination
with other Programs
3.9.1
Enhancing Cooperation and Coordination
In addition to the DWSRF, there are many other com-
plementary federal and state assistance programs.
Navigating these funding sources can be time-consum-
ing and difficult, particularly for small and rural com-
munities that often have significant needs and minimal
resources. Throughout the steps of the DWSRF fund-
ing process, cooperation and coordination with other
assistance programs at the state and federal levels sim-
plifies the funding process and enhances guidance for
potential borrowers.
Many states have taken steps to implement coordinated
funding strategies to target specific needs, benefiting
those seeking assistance as well as those providing assis-
tance. These efforts enhance communication between
agencies and reduce administrative work, maximizing
resources and the benefits achieved. States use a variety
of approaches to coordinate funding between assistance
programs, including:
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• One-stop meetings or screenings. Some states hold
meetings that involve multiple agencies coming
together to provide all relevant information for project
assistance, including information about funding
sources, eligibility criteria, the application process, etc.
• Technical assistance. Assistance is often provided for
small and rural communities that are unfamiliar with
the funding and application process of the DWSRF.
• Coordinating documents. These documents, such as
memoranda of understanding and agreements, serve as
formal commitments to enhance cooperation and
coordination among state and federal agencies.
• Joint environmental reviews. Some programs streamline
the environmental review process by accepting environ-
mental reviews for other programs whenever there is
joint funding or providing common environmental
review procedures.
• Regular project review meetings. Some states hold
meetings that discuss applicants and issues, such as
readiness for construction and environmental review
status.
• Funding fairs or events. These events provide infor-
mation about the multitude of funding options avail-
able to those seeking assistance.
• Internet websites. Many states have created websites
that provide information about assistance options and
program requirements. Two examples include
searchable databases of funding sources and self-
assessment tools that allow utilities to determine the
sources of funding for which they are eligible.
• Uniform applications. In some cases, a single applica-
tion may be available for multiple funding programs.
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.7-3.9
Federal Funding Process/Program Requirements for Making Loans/Cooperation
and Coordination with other Programs
EPA
• Negotiate with the DWSRF program to develop a formal schedule of capitalization grant payments.
• Ensure programs are funding a minimum of fifteen percent of all available loan assistance to small communities
or have a formal plan to meet these requirements in the future.
• Approve state proposals for developing a disadvantaged community assistance program.
• Ensure state programs do not exceed the maximum of thirty percent of each capitalization grant for eligible
disadvantaged community assistance.
State Program Office
• Accept all grant payments within the earlier of eight quarters of the grant award or twelve quarters of the allot-
ment of federal funds.
• Enter into binding commitments within one year after receiving each capitalization grant payment. Binding
commitments must equal total grant payments deposited to the Fund plus associated state match.
• Provide a minimum of fifteen percent of available loan assistance annually to small communities. If unable to
provide this level of assistance, provide a detailed explanation within the IUP to explain why the program is
unable to meet this requirement and how the program plans to meet this requirement in the future.
• Provide no more than thirty percent of each capitalization grant for disadvantaged community assistance in the
form of negative interest rates or principal forgiveness according to approved affordability criteria.
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3.10
Project Application Process
3.10.1
Developing the Project Priority Lists
Timing of the Intended Use Plan. DWSRF programs are
required annually to develop a formal IUP.
Development of the IUP is a permanent requirement
and an IUP must be completed even if the program is
not receiving a capitalization grant. Annual lUPs
describe how programs intend to allocate all available
funds in a timely and expeditious manner, provide infor-
mation on amounts reserved for project assistance, and
detail amounts reserved for DWSRF set-asides. Projects
highlighted for assistance in the upcoming fiscal year are
presented in project priority lists. State programs are
also required to provide well-defined outputs and out-
comes as part of their capitalization grant application;
however DWSRF programs will often include this type of
information within their lUPs as well.
Fundable Project Lists
Details must include:
• Name of the public water system
• Priority assigned to the project
• Project description
• Expected terms of assistance
• Service population
DWSRF programs typically include their IUP with the
capitalization grant application; however, some states
will submit their lUPs to EPA for review prior to sub-
mitting the grant application. Although timing may dif-
fer between state programs, annual lUPs must be sub-
mitted no later than when the capitalization grant appli-
cation is submitted to EPA for approval. EPA will not
review a capitalization grant application without an
accompanying IUP.
Developing the Project Priority Lists. Two lists of priority
projects are included in the annual IUP. These lists
include the comprehensive project list and the fundable
project list. The comprehensive list includes all projects
that are eligible for program assistance and have submit-
ted a pre-application for priority listing. From the com-
prehensive list, programs develop a fundable list of proj-
ects that are expected to receive assistance in the
upcoming year. State programs will often evaluate a
project that is not able to receive funding during the
upcoming year for possible technical or financial trouble
areas. In some cases, state programs will offer technical
assistance to these systems to ensure they are capable of
receiving funding during the next project cycle.
When developing the fundable and comprehensive pri-
ority lists, state programs must include additional infor-
mation to define each project listed as eligible to
receive SRF assistance. Additional details as part of the
fundable project list include the name of the public
water system, the priority assigned to the project, a
description of the project, expected terms of assistance
based on current information available, and the popula-
tion of the service area at the time of loan application.
Remaining projects on the comprehensive list must
include information on the priority assigned and, if
available, the expected funding schedule.
Preapplications are often collected to gather this type of
information. Programs may use preapplications to
gather basic project eligibility information before
requesting a detailed application at a later date.
Adhering to the Priority Ranking System. Project priority
lists are arranged based on a program's priority ranking
system. All programs must include the details of their pri-
ority ranking system criteria within the annual IUP. Both
the IUP and the priority ranking system are subject to
public review and comment. All priority systems are
required to focus funding on projects that: 1) address the
most serious risk to human health; 2) are necessary to
ensure compliance with the requirements of SDWA; and
3) assist systems most in need, on a per household basis.
A state that does not adhere to these requirements must
explain why it is unable to do so in its IUP
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Priority Ranking Systems
Priority projects must:
• Address the most serious risk to human health
• Ensure compliance with all SDWA requirements
• Assist systems most in need
Submitting Priority Lists for Review. In most cases, the
project priority lists are included with the annual IUP or
as part of the capitalization grant application. In cases
where a state has not yet completed its project priority
lists, the IUP may be developed as part of a two-part
process. In these cases, programs may develop the IUP
without the project priority lists and only include infor-
mation on the use of the DWSRF set-aside funds.
Public review and comment are still required for this
IUP before submitting with the capitalization grant
application. When the priority lists are complete, pro-
grams generate this additional information to detail the
use of the SRF funds for loan assistance. After an addi-
tional round of public review and comment, programs
would submit this new information as part of an amend-
ment to the original capitalization grant application.
(Reference: 2000 DWSRF Interim Final Rule, Section
35.3555(a), (b), and (c))
General DWSRF Priority Setting Process
Comprehensive List
(All Ranked Projects)
Proceed down the
list from highest to
lowest priority
NO
What technical
assistance can we
provide to help the
item get ready?
sysl
Will the system be ready to
proceed in this funding cycle?
YES
Fundable List
(Projects Ready
to Proceed)
3.10.2
Description of Eligible Applicant Types
General Eligibility. DWSRF programs may provide
assistance to all publicly- and privately-owned commu-
nity water systems or nonprofit noncommunity water
systems. For a nonprofit system to be eligible for SRF
funding, it must have a federal tax exempt status identi-
fication number. Nonprofit systems may include school
systems, day care centers, churches, or retreat centers.
Systems that are federally-owned or recognized as for-
profit noncommunity water systems are not eligible for
assistance through the Fund.
DWSRF Assistance Recipients
Eligible applicants include:
• Publicly-owned community water systems
• Privately-owned community water systems
• Nonprofit noncummunity water systems
Ineligible Applicants. All borrowers receiving program
assistance must demonstrate full technical, managerial,
and financial capacity and full compliance with all
national primary drinking water regulations or variances.
If an applicant does not demonstrate full compliance in
all of these areas, it may not be eligible for DWSRF
assistance. In such cases, assistance is only offered to
those recipients that agree to undertake appropriate
operational changes to ensure future compliance or
agree to use assistance offered to address the specific
cause(s) of noncompliance. (Reference: 2000 DWSRF
Interim Final Rule, Section 35.3520(a) and (d))
3.10.3
Description of Eligible Project Activities
General Project Categories. DWSRF assistance is pro-
vided for projects that address a current violation or
will prevent a future violation of health-based drinking
water standards.
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a
Eligible project categories include:
• Consolidation of drinking water supplies,
• Creation of new systems,
• Costs for maintaining drinking water sources,
• Storage capacity costs,
• Transmission and distribution costs,
• Drinking water treatment costs, and
• Drinking water security measures
Additional project types not explicitly defined through
the categories listed above may still be eligible for assis-
tance through the Fund. Questions related to the eligi-
bility of individual project types are answered by EPA
on a case-by-base basis. Sample activities for each eligi-
ble project category are described below:
Consolidation of Supplies. Consolidation projects refer
to the consolidation of drinking water supplies when
supplies are either contaminated or when a system can
no longer maintain compliance due to a lack of proper
technical, financial, or managerial capacity.
Creation of New Systems. DWSRF programs may fund
the development of new systems to address current pub-
lic health concerns or consolidate existing systems that
face technical, financial, or managerial capacity chal-
lenges. Projects that authorize the creation of a new sys-
tem are limited to the specific geographic area affected
by contamination. Projects to consolidate multiple facil-
ities are limited to the current service areas for each
drinking water system. For all consolidation projects,
applicants must ensure that consolidated systems will
maintain compliance with all SDWA requirements.
When funding these types of projects, programs must
show that applicants have provided sufficient public notice,
considered alternative solutions, and are implementing the
most appropriate and cost-effective solutions.
Drinking Water Sources. Eligible costs include the reha-
bilitation of existing drinking water sources and the
development of new sources to replace those that are
contaminated. Sample projects may include dredging
activities near intake facilities, the replacement of con-
taminated wells, or the construction of new wells to
meet current demands.
Storage Capacity. DWSRF programs may provide assis-
tance for the upgrade or installation of finished drinking
water storage facilities to prevent possible contamina-
tion. Activities can include the development of a fin-
ished drinking water reservoir, recoating or repair of an
existing storage tank, or the replacement of onsite
sludge ponds.
Transmission and Distribution. Costs for transmission
and distribution include the installation or replacement
of transmission pipes and distribution networks to
improve water pressure or for the prevention of possible
contamination caused by leaks or breaks in the system.
Projects can include the construction of new water
lines, the installation of new elevated tanks or storage
reservoirs, or the construction of a new drinking water
booster and pump station.
As with all projects funded through the DWSRF pro-
gram, it is important to note that projects may only be
sized to accommodate a reasonable amount of growth
expected over the life of the associated facility. Growth
may not be a substantial portion of any project.
Treatment Costs. Treatment costs include expenses
related to the installation, replacement, or upgrade of
treatment facilities to improve drinking water quality or
to comply with primary and secondary drinking water
Capitalization
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standards. Individual projects can include the installa-
tion of new nitrate treatment facilities, improved filtra-
tion methods for surface water, or construction
improvements for chlorine storage techniques.
Security Measures. DWSRF programs may also provide
assistance for drinking water security measures. These
may include assistance for the development of vulnera-
bility assessments or for the development of contingency
and emergency response plans. Other types of security
components may also be included within the scope of a
larger infrastructure project. Sample security measures
include:
• Facility fencing,
• Security cameras and lighting,
• Motion detectors,
• Redundancy (systems and power),
• Securing chemical and fuel storage areas,
• Lab equipment,
• Enhanced filtration/disinfection (for biological agents),
• Enhanced treatment (for chemical agents),
• Backflow prevention devices in distribution system, and
• Covering for finished water reservoirs
Additional protection for drinking water sources may be
funded through the DWSRF set-asides. Specific activi-
ties may include fencing and security cameras for drink-
ing water sources or the development of source water
vulnerability assessments and emergency response plans.
It is important to note that certain security measures
related to operations and maintenance costs are not eli-
gible for assistance through the DWSRF program.
Such ineligible activities may include assistance for the
hiring of security guards, the purchase of disinfection
chemicals, or funding for monitoring costs.
Eligible Project-Related
Costs. The DWSRF may
also fund some types of
additional costs necessary to
fully implement an eligible
project.
These additional costs must
fall within one of the fol-
lowing categories:
• Costs for land acquisition
that are integral to project
implementation,
• Costs related to project planning, design, and other
pre-project costs, and
• Costs related to system restructuring activities
(Reference: 2000 DWSRF Interim Final Rule, Section
35.3520(b) and (c))
3.10.4
Ineligible Project Types
Several distinct categories of funding are ineligible for
assistance through the DWSRF program. According to
formal regulations, programs are not permitted to pro-
vide assistance in the following project areas: 1) the
development or rehabilitation of dams; 2) the purchase
of water rights (except when water rights are trans-
ferred as part of a system consolidation effort); 3) the
building or rehabilitation of reservoirs (except for fin-
ished water reservoirs and reservoirs essential to the
treatment process); 4) projects primarily developed for
fire protection; 5) projects developed primarily to
accommodate future population growth; and 6) proj-
ects that have received assistance through the Indian
Tribes and Alaska Native Villages national set-aside.
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In addition to these general categories of ineligible
projects through the DWSRF program, states may not
provide assistance for certain ineligible project-related
costs, including laboratory fees related to routine com-
pliance monitoring or for any type of operation and
maintenance costs. (Reference: 2000 DWSRF Interim
Final Rule, Section 35.3520(e))
Ineligible DWSRF Project Assistance
Projects Ineligible for Assistance:
• Installation/rehabilitation of dams
• Purchase of water rights
• Development/rehabilitation of reservoirs
• Projects primarily for fire protection
• Projects primarily for future growth
• Indian Tribes/Alaska Native Villages national
set-aside recipients
Ineligible Project-Related Costs:
• Routine compliance monitoring laboratory fees
• Operation and maintenance expenses
3.10.5
Description of Eligible Assistance Structures
DWSRF programs may provide assistance in a variety of
forms. In addition to assistance to eligible recipients in
the form of a loan, programs may also provide assis-
tance through the purchase of local debt, the purchase
of debt insurance, or to secure SRF debt obligations
when leveraging. (Reference: 2000 DWSRF Interim
Final Rule, Section 35.3525)
Assistance through a DWSRF Loan. DWSRF loans are
provided for individual projects or for a group of multiple
projects to an individual recipient. Programs may also
combine a previous planning and design loan obligation
for an individual recipient with a newly-issued loan for
project construction. Program recipients may also apply
for a series of loans for a particularly large or expensive
project. In this case, programs may issue multiple loans
over the course of several years for one project. These
types of projects are often called "phased projects."
DWSRF Assistance Structures
Program assistance through:
• DWSRF Loans
• Refinance or Purchase of Local Debt
• Insurance or Guarantee for Local Debt
• SRF-lssued Bond Security
Refinance or Purchase of Local Debt. DWSRF programs
also have the option to purchase or refinance local debt
obligations. Programs may purchase local debt through
a direct purchase of municipal bonds issued for project
construction. Program regulations require that all proj-
ects where debt was incurred must have a construction
initiation date after July 1, 1993. In the case where a
local government issues a multipurpose bond, only the
portion used for the DWSRF eligible project may receive
assistance through the program. Privately-owned sys-
tems are not eligible for refinancing.
Insurance or Guarantee for Local Debt. In an effort to
improve the credit market access for a local community
or to assist in reducing borrowing interest rates, the
DWSRF may provide assistance through the purchase of
local debt insurance or a debt guarantee. Programs may
only provide assistance for debt incurred to implement a
DWSRF-eligible project. In the case of default follow-
ing a DWSRF issued guarantee, the program would be
responsible for repaying the local debt obligation. It is
imperative that DWSRF programs review the creditwor-
thiness of the guarantee recipient and ensure acceptable
coverage for the local debt obligation.
Security for DWSRF Issued Bonds. In addition to direct
assistance for program recipients, DWSRFs have the
capability to issue program debt. Program debt is
issued in the form of SRF bonds. When issuing bonds
to increase the level of funds available for program loans
and other types of assistance, DWSRF programs must
explore options to secure program-issued debt. In
many cases, programs will use fund assets (e.g., the fed-
eral capitalization grant, loan repayments, or interest
earnings) to secure SRF issued bonds. Security is pro-
Capitalization
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vided on future loan principal and interest repayments
to the bond holders. All bond proceeds, net issuance
costs, must be deposited directly to the Fund to finance
additional DWSRF project assistance.
For more information on SRF leveraging activities, refer
to Section 3.5: State Leveraging Activities to Increase
Funds Available of this handbook.
3.10.6
Additional Uses of SRF Funds
In addition to assistance in the form of a loan, purchase
of local debt or debt insurance, and to secure SRF debt
obligations when leveraging, DWSRF programs may
also use funds for additional purposes. Additional uses
include the right to reserve a portion of funds for
administration and set-aside expenditures and the right
to earn interest on idle funds. It is important to note,
however, that all monies deposited into the Fund may
not remain there primarily to earn interest.
For more information on reserving funds for adminis-
tration and other types of set-aside expenditures, refer
to Section 4.1: Four Types of Set-Asides for more
information.
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DWSRF Assistance Options and Structure
DWSRF Loans
• Loans for
individual
projects
• Loans for
multiple projects
• Combining
previous planning
and design loan
obligations with
newly issued
loans
Refinance or
Purchase of Local
Debt
• Refinance debt
for lower interest
rate
• Direct purchase
of municipal
bonds at loan
closing
Insurance or
Guarantee for
Local Debt
• Purchase
insurance for
municipal debt
• Guarantee
holders of local
debt that
repayment will
continue if
municipality or
public water
system defaults
SRF Issued
Bond Security
• Security provided
on future loan
principal and
interest repay-
ments to bond
holders
Other
• Earn interest
on funds
• Administration
activities and
set- aside
expenditures
• Guarantee debt
obligations when
leveraging
• Series of loans for
phased projects
Capitalization
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.10
Project Application Process
EPA
• Review and approve annual lUPs and PPLs to assure that projects and recipients are eligible.
State Program Office
• DWSRF programs are required to develop a formal IUP annually for the life of the program.
• Programs must include two priority lists with each IUP. These lists include the comprehensive project list and
the fundable project list.
• All programs must include the details of their priority ranking system within the annual IUP.
• All priority systems must place priority on projects that address the most serious risk to human health, that are
necessary to ensure compliance with the requirements of SDWA, and that assist systems most in need.
Capitalization
Grant
Application
EPA
Acceptance
and Award
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Detailed State
Application
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3.11
Detailed State Loan Application Review
To conduct a fully detailed application review, programs
must receive additional documentation to ensure that
applicants have proper project planning and design.
Additional application material will ensure that a project
complies with all DWSRF program requirements for eli-
gible reimbursable costs and that the system meets all
technical, financial, and managerial capacity determina-
tions. Throughout the detailed application process, the
program may request additional material from the appli-
cant. State programs will often use a checklist to keep
track of what material is received and what additional
material is necessary to complete the application.
3.11.1
Technical, Financial, and Managerial
Review (TFM)
All program recipients must pass a full TFM review. In
addition to demonstrating that the system can maintain
compliance based on technical and managerial activities,
they must also demonstrate an acceptable level of finan-
cial management, including the ability to repay the
DWSRF loan and maintain acceptable facility opera-
tions. If a system does not have adequate TFM capaci-
ty, they may only qualify for assistance if the assistance
will target a specific area of noncompliance or if the sys-
tem agrees to develop a formal plan to make the appro-
priate changes necessary to improve compliance. In
some cases, it may be determined that the project is not
ready to proceed. In those instances, the program
should provide appropriate technical assistance to
resolve identified TFM issues.
"
'All program recipients must undergo
a full TFM review before receiving
assistance."
3.11.2
Environmental Review Procedures
General Requirements. All projects receiving assistance
through the Fund must pass an environmental review to
evaluate possible negative environmental outcomes as a
direct result of project assistance. Programs must con-
duct this review on all projects receiving direct Fund
assistance, all refinanced or reimbursed projects, and all
SWP activities through the DWSRF set-asides unless the
activities solely involve administration (e.g., personnel,
equipment, or travel) or technical assistance. States are
not required to conduct environmental reviews for all
other set-aside activities as EPA has determined that,
due to their nature, they no not individually, cumula-
tively over time, or in conjunction with other actions
have a significant effect on the environment.
Programs must follow environmental review procedures
as required by the DWSRF program regulations. States
may employ a State Environmental Review Process
(SERP) that is similar to the process proposed through
the National Environmental Policy Act (NEPA). These
procedures are often called NEPA-like. Projects whose
cumulative funding is equal to the amount of the feder-
al capitalization grant are subject to the SERP or
NEPA-like review. For all other projects, those in an
amount greater than the amount of the federal capital-
ization grant, states have the option to use an alterna-
tive SERP which they must propose and have approved
by EPA. In the absence of an approved alternative
process, all projects are subject to a NEPA-like review.
For all environmental reviews, programs must fully doc-
ument all information collected, procedures followed,
and the reasons listed for all decisions. For example, a
state may determine a finding of no significant impact
following an Environmental Assessment (EA) or may
recommend that the project not proceed following the
preparation of a full Environmental Impact Statement
(EIS). Programs must document all decisions.
EPA Review Procedures. All state environmental review
procedures, both a NEPA-like SERP and an alternative
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SERF, must undergo a review and receive approval from
EPA. The same criteria for both types of environmental
review approaches are used in the CWSRF and DWSRF
programs. Once these processes are approved, programs
may incorporate this information into their OAs. Any
changes to the State Environmental Review Procedures
must receive approval from EPA prior to implementation.
Categorical Exclusions. In some cases, projects may not
require a full environmental review. These types of
projects may fall under the particular definition of a
Categorical Exclusion (CE). These projects include
activities that are known to not cause a significant envi-
ronmental impact. Such activities may include the
replacement of existing transmission lines, the imple-
mentation of a wellhead protection program through
the DWSRF set-asides, or a loan issued for planning and
design. Only actions that do not individually, cumula-
tively over time, or in conjunction with other actions
have a significant impact on the quality of the human
environment, may qualify as a CE.
3.11.3
Federal Crosscutting Authorities
Defining federal Crosscutting Authorities. Federal cross-
cutting authorities represent a general category of federal
laws, governmental policies, and executive orders that
broadly influence the activities of individual citizens, pri-
vate businesses, and public entities. These authorities
influence actions in areas of environmental protection,
protection of civil rights, and the protection of open and
fair competition in business practices, just to name a few.
Federal crosscutting authorities also affect how federal
assistance dollars are spent; in particular, restricting how
they may be used according to existing federal law or
policy. Because DWSRF programs are capitalized by fed-
eral assistance grants, Congress requires DWSRF pro-
grams to apply federal crosscutting authorities to certain
DWSRF program activities.
General Requirements. Although EPA is ultimately
responsible for compliance with federal crosscutting
authorities as they apply to state DWSRF programs,
individual state DWSRF programs are required to
ensure SRF loan recipients also comply with these same
crosscutting authorities. Congress recognizes that the
DWSRF program is comprised of several types of funds
that may include federal grant dollars, state matching
funds, loan repayments, interest earnings, and bond
proceeds. When a borrower receives loan assistance
from the Fund, it is receiving a mixture of these fund-
ing sources. As it is sometimes impossible to determine
the exact source of funds for each assistance agreement,
Congress requires SRF programs to apply federal cross-
cutters to a state-selected number of projects with total
funding that is equal to the amount of each capitaliza-
tion grant deposited to the Fund. States that elect to
impose the requirements of federal crosscutting authori-
ties to projects and activities in amounts that are more
than the amount of the capitalization grant may credit
this excess to meet future crosscutting requirements. It
is important to note that states may only use this com-
pliance credit within the account that generated the
credit. For example, a state cannot use a credit gained
from excess compliance through set-aside account activ-
ities to meet future crosscutting requirements for proj-
ects funded through the DWSRF Fund.
Crosscutting Authorities . . .
"Crosscutting authorities apply to projects
and activities whose total funding is
equal to or greater than the amount of
each capitalization grant."
Application to DWSRF Set-Asides. In addition to apply-
ing general crosscutting requirements on the use of
DWSRF funds for loan assistance, programs are
required to apply federal crosscutting authorities to all
DWSRF set-aside assistance activities. Although all set-
aside activities are generally subject to federal crosscut-
Capitalization
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Application
EPA
Acceptance
and Award
Project
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Detailed State
Application
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Applicable Crosscutters During Relevant Stages of Project Implementation
Planning and Design
Procurement
Construction
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Civil Rights Act of 1964
Section 504 of the
Rehabilitation Act of 1973
Age Discrimination Act of 1975
Prohibition Against Sex
Discrimination Under the
Federal Water Pollution Control
Act
Equal Employment
Opportunity
National Environmental
Protection Act
National Historic
Preservation Act
Archeological and Historic
Preservation Act
Coastal Zone Management
Act of 1972
Clean Air Act
Endangered Species Act
Protection and Enhancement
of the Cultural Environment
Floodplain Management
Protection of Wetlands
Farmland Protection Policy Act
Fish and Wildlife
Coordination Act
Safe Drinking Water Act
Wild and Scenic Rivers Act
Coastal Barriers Resource Act
Demonstration Cities and
Metropolitan Development Act
Lobbying Disclosure
Civil Rights Act of 1964
Section 504 of the
Rehabilitation Act of 1973
Age Discrimination Act of 1975
Prohibition Against Sex
Discrimination Under the
Federal Water Pollution
Control Act
Equal Employment
Opportunity
Women's and Minority
Business Enterprise
Preservation of Open
Competition and Government
Neutrality Towards
Government Contractors'
Labor Relations on Federally
Funded Constructed Projects
Debarment and Suspension
Prohibitions Relating to
Violators of the Clean Air Act
and the Clean Water Act with
Respect to Federal Contracts,
Grants, or Loan
Civil Rights Act of 1964
Section 504 of the
Rehabilitation Act of 1973
Age Discrimination Act of 1975
Prohibition Against Sex
Discrimination Under the
Federal Water Pollution
Control Act
Equal Employment
Opportunity
Women's and Minority
Business Enterprise
Uniform Relocation Assistance
and Real Property Acquisition
Act
Table: Application of federal crosscutters from project planning and design, through procurement, to project construction and completion.
Capitalization
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EPA
Acceptance
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a
ter requirements, in many cases, these authorities are
not implicated. For example, administrative costs would
not require the application of environmentally-based
federal crosscutters such as NEPA or the Endangered
Species Act. In these cases, federal crosscutters would
apply only when and if appropriate.
Following the Crosscutter Handbook. To assist state pro-
grams in complying with federal crosscutting require-
ments, EPA developed the "Cross-Cutting Federal
Authorities" handbook in October of 2003. This hand-
book lists all current federal authorities that apply to
SRF program recipients, including:
• Environmental authorities (such as the Coastal Zone
Management Act and the Endangered Species Act),
• Social policy authorities (including the Civil Rights
Act and Equal Employment Opportunity require-
ments), and
• Economic or other miscellaneous authorities (includ-
ing the Demonstration Cities and Metropolitan
Development Act and the Preservation of Open
Competition and Government Neutrality Act)
For each federal authority listed in this handbook, EPA
provides a background discussion and a detailed descrip-
tion of its specific applicability to the SRF program.
The handbook is written for both the CWSRF and
DWSRF programs.
Although this handbook represented an exhaustive
resource of all federal crosscutting authorities applicable
to the SRF program at the time of its original publica-
tion, programs are responsible for complying with any
new federal authorities that may also affect the use of
federal assistance dollars. EPA and individual DWSRF
programs must recognize that the current list of federal
crosscutters is subject to change.
Anti-Discrimination Law Requirements. In general,
federal crosscutters are applied only to projects in an
amount equal to the federal capitalization grant and for
project assistance provided through the DWSRF set-
asides; however, programs are required to apply general
anti-discrimination law requirements to all projects uni-
versally, regardless of the source of SRF funds.
Currently, these crosscutters include the Civil Rights
Act of 1964, Section 504 of the Rehabilitation Act of
1973, and the Age Discrimination Act of 1975.
Minority and Women's Business Enterprise (MBE/WBE)
Requirements. Each DWSRF program is required to
consult the EPA Regional Administrator to develop a
fair share goal for the participation of MBE/WBEs in
receiving DWSRF project assistance. These goals are
based on the presence of MBE/WBEs within the rele-
vant market area for DWSRF project assistance. Just as
the DWSRF program is required to make progress in
meeting fair share goals for MBE/WBEs, SRF loan
recipients of assistance in an amount equal to the capi-
talization grant are also required to follow a standard
procedure to ensure compliance in this area. State pro-
grams must ensure that such program recipients follow
the six affirmative steps when awarding contracts using
program assistance. In addition, all contractors in such
cases are required to use these same procedures when
awarding subcontract agreements. (Reference: 2000
DWSRF Interim Final Rule, Section 35.3575 (a-e))
3.11.4
Financial Analysis and Loan Repayment
Financial Assessment of Program Recipients. Prior to
awarding a loan for project assistance, DWSRF pro-
grams must perform an assessment of all potential bor-
rowers to ensure creditworthiness. This process is often
conducted by state program staff; however, some pro-
grams will conduct these reviews with the assistance of
local financial institutions, such as banks, or with the
help of outside contractors. EPA must review and
approve a program's process for conducting financial
assessments and identifying acceptable repayment
sources and private security means.
Capitalization I EPA • Project I Detailed State I General ^H Project
Grant ^B Acceptance ^B Application ^B Application • Loan Closing ! ! Construction
Application ^1 and Award H Review ^1 Review ^H Procedures ^H Phase
Project | Loan
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Each program borrower must demonstrate adequate
revenue or security to repay an SRF loan. The process-
es for public and private borrowers differ, although the
justification for the review is the same. The evaluation
of creditworthiness is used to ensure both public and
private borrowers maintain sound financial management
and possess the ability to repay an SRF loan.
"All borrowers fire required to
demonstrate adequate security for
loan repayment."
Public Borrowers: Approving a Dedicated Repayment
Source. When working with public borrowers, program
staff may review audited financial statements and dis-
cuss types of revenue sources the entity may dedicate to
the repayment of an SRF loan. For example, revenue
sources may include a pledge of additional revenues
collected through user fees. Public systems must also
demonstrate the appropriate ability to collect revenue
according to state law and/or local ordinances.
Private Sorrowers: Establishing Adequate Security.
Working with private borrowers often requires more
creativity on the part of program staff in determining
creditworthiness and financial capability for loan repay-
ment. Private borrowers may include privately-owned
community or nonprofit noncommunity water systems.
When working with private borrowers, SRF programs
are required to ensure the recipient of SRF assistance
has adequate security for an SRF loan. For example,
program staff may review income tax statements when
audited fmancials are not available.
When adequate security cannot be easily established
(e.g., through company assets or other revenue
sources), SRF programs may require unique collateral
arrangements or may explore other options in credit
enhancement for the applicant. SRFs have used several
types of collateral arrangements, including the establish-
ment of a debt payment reserve or requiring the pur-
chase of insurance to guaranty loan repayment. In
some cases, SRF programs have approved both corpo-
rate and personal guarantees of the loan recipient.
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.11
Detailed State Application Review
EPA
• All state environmental review procedures, both a NEPA-like SERF and an alternative SERF must undergo a
review and receive approval from EPA.
• Although EPA is ultimately responsible for compliance with federal crosscutting authorities as they apply to state
DWSRF programs, individual programs are required to ensure SRF loan recipients also comply with these
authorities.
• EPA must review and approve a program's process for conducting financial assessments and identifying acceptable
repayment sources.
State Program Office
• State programs must ensure all program recipients pass a full TFM review.
• Programs must conduct an environmental review on all projects receiving direct Fund assistance, all refinanced or
reimbursed projects, and all SWP activities through the DWSRF set-asides unless the activities solely involve
administration (e.g., personnel, equipment, or travel) or technical assistance.
• Programs must apply federal crosscutters to projects and activities in an amount equal to the amount of each cap-
italization grant deposited to the Fund. In addition, federal crosscutters must be applied to all DWSRF set-aside
activities.
• Programs are required to apply general anti-discrimination law requirements to all projects, regardless of the
source of SRF funds.
• Each DWSRF program is required to consult the EPA Regional Administrator to develop a fair share goal for the
participation of minority- and women-owned businesses in receiving DWSRF project assistance. State programs
must also ensure SRF program recipients of assistance, in an amount equal to the capitalization grant, must fol-
low the six affirmative steps when awarding subcontract assistance.
• Prior to awarding a loan for project assistance, DWSRF programs must perform an assessment of all potential
borrowers to ensure creditworthiness and identify source of repayment and, if applicable, security provisions.
Capitalization
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Application
EPA
Acceptance
and Award
Project
Application
Review
Detailed State
Application
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3.12
Project Approval and General
Loan Closing Procedures
3.12.1
Funding the Highest Priority Projects
Funding in Priority Order. DWSRF programs are
required to fund projects in strict priority order accord-
ing to the comprehensive and fundable project priority
lists. Projects are initially ranked based on an approved
project priority ranking system to develop a list of all
projects eligible for funding through the DWSRF pro-
gram. Based on this comprehensive list, a final fundable
list of projects is developed based on projects that are
ready to proceed during the current funding cycle.
Programs are required to offer loan assistance according
to the ranking of the final fundable project priority list.
(For more information on the development and require-
ments for the DWSRF program priority lists, see Section
3.1.4 of this manual.)
a. . . DWSRF programs are required to
fund projects in strict priority order based
on approved project priority lists."
3.12.2
Following Formal Project Bypass Procedures
General Requirements. Although programs are required
to fund projects in strict priority order, deviations from
the project priority lists are allowable under certain cir-
cumstances. Projects on the fundable list can be
bypassed upon written notice to the loan applicant if the
project is not ready to proceed or another project is in
need of emergency program assistance. All programs are
required to document their unique procedures for
bypassing projects within their IUP. Procedures must
include specific conditions that allow for a project to be
bypassed and the method used to identify which projects
would receive funding instead. In all circumstances,
except when bypassing a project on an emergency basis,
programs must fund the next highest ranked project on
their unique fundable list.
Funding Projects on an Emergency Basis. Programs are
allowed the flexibility to provide funding assistance on
an emergency basis. Emergency projects are those
defined as projects that require immediate attention to
protect public health or other state-defined emergency
situations. All procedures for identifying and accepting
an emergency project for DWSRF program assistance
must be detailed in the IUP. Emergency projects may
originate from the project priority lists; however, pro-
grams are also able to fund projects that do not previ-
ously appear on these approved project lists. Programs
are required to list all projects receiving this type of
assistance in their Biennial Reports and discuss the
funding for these recipients during the annual program
review. The way in which individual programs will
define what constitutes an emergency funding situation
will vary. For example, a state may define a situation for
emergency financing only for water supply systems in
need of emergency repairs and when no other funding
source is available. These types of determinations are
made by the state primacy agency.
All projects, including the projects funded on an emer-
gency basis, are subject to existing TFM capacity
requirements, as well as applicable environmental review
and crosscutter procedures. Some states may choose to
identify emergency projects as those in an amount
greater than the amount of the federal capitalization
grant. In this way, projects may be defined as those
projects receiving assistance in an amount equivalent to
state match, loan repayments, or interest earnings to
limit the applicable environmental and crosscutter
review requirements. (For more information on cross-
cutter requirements applicable to projects whose cumu-
lative funding is equal to the federal capitalization grant,
see Section 3.11.3 of this manual.)
Additional Criteria for Bypassing Projects. States may
also develop additional criteria for bypassing projects for
reasons other than readiness to proceed or accommoda-
tions for emergency situations. In cases where a state
program bypasses a project for reasons other than readi-
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ness to proceed, programs must document these occur-
rences in their Biennial Report and provide an explana-
tion during the annual review. Examples of additional
bypass allowances include failure to adhere to a particu-
lar application schedule or preset deadlines on the part
of the applicant, withdrawal of the application by the
potential borrower, or reaching a state-determined limit
on annual loan assistance provided to a single borrower
through the Fund.
Project Bypass Procedures
Projects on the priority list may be bypassed if:
1. The system does not meet the state's minimum require-
ments for technical, financial, or managerial capacity,
2. The project is not ready to proceed, or
3. Another project is in need of emergency assistance.
3.12.3
Establishing Loan Terms
DWSRF programs have the flexibility to offer a wide
variety of assistance types and establish unique borrow-
ing provisions for loan agreements through the Fund.
Programs have the ability to set unique interest rates,
offer various repayment terms, and assess fees on pro-
gram borrowers. These types of decisions may affect
the growth or ability of the SRF Fund to provide future
project assistance and require a sound approach to
financial planning. States are encouraged to have a
long-term financial plan to evaluate expected impacts of
funding decisions on the overall health of the Fund.
Programs will often balance decisions and adjust loan
terms to provide a beneficial subsidy to the borrowing
community and to ensure the continued health of the
SRF Fund. For example, a lower interest rate may pro-
vide a greater incentive to the individual borrower in
the near time, but it will reduce the future income avail-
able to the program for additional loans.
K. . . SRF programs are encouraged to
have a long-term financial plan to evalu-
ate expected impacts of funding decisions
ont he overall health of the Fund . . ."
Setting the Loan Interest Rate. Programs are given con-
siderable authority in setting interest rates as appropri-
ate for their individual program and by borrower type.
According to regulations, programs may set borrowing
rates between zero and the current market interest rate
for all loans. If providing disadvantaged community
assistance, programs may also provide a negative inter-
est rate; however, the subsidies provided in these cases
are limited to no more than thirty percent of the annual
amount of the capitalization grant deposited to the
Fund. (See Section 3.8.1 for more information on dis-
advantaged community assistance.)
SRF Loan Rates:
• General loan rates must remain between zero and the
current market rate.
• As an extra subsidy, disadvantaged communities may
receive a negative interest rate loan.
The responsibility for establishing the effective market
rate lies with the state program office. For example, a
state may use the Bond Buyer 20-Bond GO Index to
define the current market interest rate when establish-
ing its effective SRF interest rate for current loans. Any
method used to define the current market rate must be
defined in the annual IUP. In addition, EPA recom-
mends that state programs describe their unique
method in a formal program OA.
When considering rates for loan recipients, programs
should not set effective interest rates at a level that may
cause the recipient to fail to meet any technical, finan-
cial, or managerial capability requirements. In addition,
when assessing fees, the DWSRF program must ensure
the effective loan rate (i.e., the loan interest rate, plus
Capitalization
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assessed borrowing fees) does not exceed the current
market rate. Please see Determination of Fees below for
more information.
Setting the Repayment Schedule. In addition to establish-
ing loan interest rates for individual borrowers, states
must establish a formal loan repayment schedule in the
final loan agreement. Requirements state that loan repay-
ments to the SRF program must start within one year of
project initiation of operations or when the project is
capable of being initiated. In cases where a possible delay
in project completion is expected, programs may require
the borrower to begin repayment within one year of the
estimated date of completion. Programs must receive
loan repayments on at least an annual basis, although
some programs may require repayments on a semi-annual
or more frequent schedule.
After the loan repayment period begins, program bor-
rowers must complete all repayments within twenty years
for standard loans but may extend the term to thirty
years (as determined by individual DWSRF program) for
loans to disadvantaged communities. When providing an
extended repayment period to a disadvantaged commu-
nity, programs must ensure the loan repayment period
does not exceed the expected design life of the project.
Programs may consider how a longer or delayed repay-
ment period may decrease the capacity of the Fund in
providing additional assistance. (See Section 3.8.1 for
more information on disadvantaged community assis-
tance through the DWSRF program.)
SRF Loan Repayments
• Repayments must begin within one year of initiation of
operations.
• Repayments must be complete within twenty years from
the first loan repayment date (thirty years for a disad-
vantaged community).
Setting Repayment Levels. Loan repayments are not
required to equal any particular amount (e.g., one-
twentieth of the total repayment amount per year).
Although not generally in use, programs may authorize
a "balloon repayment" or escalating repayment sched-
ules for SRF loans. In these cases, the borrower is
required to provide higher annual repayment amounts
in later years in contrast to lower repayment amounts in
the earlier years. Similarly, programs may also allow
borrowers to provide interest-only payments for a set
period of time, with higher annual repayment amounts
in later years. For all programs that wish to include
interest-only or "balloon repayment" options, the IUP
must contain a discussion of the method for calculating
this repayment schedule. Programs should recognize
the potential negative effects, including an increase in
the possibility of borrower default during the later years
of loan repayment or the decreased capacity of the Fund
to provide program assistance in the current years.
Determination of Fees. In addition to establishing loan
repayment terms and interest rates, programs are given
the authority to assess additional fees on program bor-
rowers. These charges may include fees assessed annu-
ally (e.g., loan maintenance fees) or an assessment of a
one-time fee during the loan closing process. Fees may
be used for several purposes. Two uses include addi-
tional project assistance through the Fund or for
DWSRF program administration activities. Programs
must document all planned and actual fee activity in
the IUP and Biennial Report.
SRF Programs May Assess Fees:
• Annually (e.g., for SRF loan maintenance), or
• During the loan closing process
Programs may require loan recipients to pay fees direct-
ly or allow the recipient to include these charges as part
of the loan principal amount. The method of assessing
and collecting fees will determine how and for what
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purposes programs may use SRF fee revenue. In all
cases, fees and interest on fees must return to the Fund
or must be deposited to an account outside the Fund.
Specific uses of fees are subject to several, additional
program requirements. These requirements are dis-
cussed further below.
Fees Paid by the Assistance Recipient. Fees paid directly by
the assistance recipient and deposited to the Fund may be
used for all eligible Fund activities, including additional
project assistance. Fees deposited to an account outside
the SRF Fund may be used for the purposes of program
administration, for combined financial administration of
both the CWSRF and DWSRF programs when operated
by the same agency, for state match, and for other allow-
able SDWA, Section 1452 activities, including activities
through the DWSRF set-asides.
Fees Included as a Portion of the Loan Principal. Fees
included as a portion of loan principal may return direct-
ly to the program Fund or may be deposited to a sepa-
rate account outside the Fund. Fee revenue deposited
to the DWSRF Fund account is eligible for all Fund
activities, while fee revenue deposited to a separate
account is eligible for program administration activities
and for other allowable SDWA, Section 1452 activities,
including activities through the DWSRF set-asides. It is
important to note that these fees may not be used for
state match or for the combined financial administration
of the DWSRF and CWSRF programs. In addition, dis-
advantaged community borrowers may not include
assessed fees as part of the loan principal amount.
When assessing fees, the DWSRF program must ensure
the effective loan rate (i.e., the loan interest rate, plus
assessed borrowing fees) does not exceed the current
market rate and is not reasonably expected to cause a
system to fail TFM capability requirements.
3.12.4
Developing the Formal Loan Agreement
Following the establishment and mutual acceptance of
all loan terms, the SRF program drafts a formal project
loan agreement. This agreement contains all require-
ments of assistance from the SRF program, including
the loan interest rate, the loan repayment term, and any
applicable loan origination or annual fees. Both the
program recipient and the DWSRF program office must
sign this agreement to ensure all terms are legally bind-
ing. A signed loan agreement becomes the formal con-
tract between program borrower and the DWSRF pro-
gram office.
According to a final project loan agreement, project
assistance is only provided after the formal loan agree-
ment is finalized and signed by both parties. According
to this contract, the DWSRF assistance recipient prom-
ises to complete the project according to schedule and
approved specifications, while the DWSRF program
office agrees to provide funding assistance on a reim-
bursable cost basis or approved alternative method.
4 Unless funds are being used to correct for a noncompliance issue.
Capitalization I EPA • Project I Detailed State I General •• Project
Grant BS Acceptance SB Application SB Application ! Loan Closing ! ! Construction
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.12
Project Approval and General Loan Closing Procedures
EPA
• EPA is responsible for oversight to ensure state programs are complying with applicable federal requirements
throughout the project approval and loan closing processes.
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State Program Office
• DWSRF programs are required to fund projects in strict priority order according to the comprehensive and fund-
able project priority lists.
• All programs are required to document their unique procedures for bypassing projects within their IUP.
• All procedures for identifying and accepting an emergency project for DWSRF program assistance must be
detailed in the IUP.
• States are encouraged to have a long-term financial plan to evaluate expected impacts of funding decisions on the
overall health of the Fund.
• Programs must document all planned and actual fee activity in the IUP and Biennial Report. In all cases, fees
and interest on fees must return to the Fund or must be deposited to an account outside the Fund.
• Project assistance is only provided after a formal loan agreement is finalized and signed by both parties.
Capitalization
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3.13
Construction Activities
and Loan Disbursement
3.13.1
Project Performance Certification
State programs require all project borrowers to desig-
nate a certified project engineer to provide continuous
oversight and verification that the project is constructed
according to design specifications. Periodic engineering
reports are collected by the SRF program to verify
progress according to the original construction schedule
agreed to in the final loan agreement. Additionally, the
borrower-designated engineer typically accompanies the
state project engineer during formal onsite construction
inspections.
If a system fails to adhere to the original project com-
pletion schedule, fails to meet ongoing compliance
under SDWA, or fails to show appropriate technical,
financial, or managerial capacity, state programs are
required to enforce remediation requirements. To
ensure that assistance recipients take the steps necessary
to maintain compliance, programs may require the
adoption of a formal Corrective Action Plan or require a
revision to the original construction schedule.
3.13.2
Project Inspections
DWSRF programs use formal onsite inspections of the
project site to verify that construction activities are com-
pleted in a timely manner, as detailed in the original
loan agreement, and according to the original design
specifications. Although there are no formal require-
ments on how often a state program must complete for-
mal project inspections, programs are required to ensure
assistance recipients are using DWSRF funding for eligi-
ble purposes and to lend additional verification for all
disbursement requests.
The frequency and complexity of formal project inspec-
tions vary state to state. Some state programs conduct
monthly project
inspections, while
others complete
only two inspec-
tions of the project
site - one after fifty
percent of the funds
have been released
to the borrower and
another after con-
struction is com-
plete and before the
last cash draw is
completed for all
remaining reimbursable costs. State programs typically
use in-house project engineers to complete inspections.
In some cases, primacy agencies may work with external
field offices or, in cases of limited staff resources, with
local county health departments to complete interim
project inspections.
Onsite Construction Inspections
General activities conducted during a construction
inspection include:
1) Adequacy of engineering supervision,
2) Oversight by water system,
3) Availability of construction drawings,
4) Compliance with the construction schedule,
5) Availability of accounting records,
6) Actual payment requests versus payment
schedules, and
7) Use of appropriate construction practices
3.13.3
Approving Requests for Reimbursement
DWSRF programs are required to verify all loan pay-
ments and construction reimbursements are for eligible
program costs only. The general process for approving
an SRF loan disbursement at the state-level requires an
initial review of all invoices and accompanying docu-
mentation. After the program checks to ensure the
disbursement request is for an active borrower, an
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active project, and that the borrower is not in signifi-
cant noncompliance4, the program staff must verify the
funds requested are within the limits set according to
the loan agreement. If the level of detail contained
within an individual disbursement request is insufficient
to allow state staff to verify the release of SRF funds,
programs may request the applicant to submit addition-
al documentation.
Often, SRF programs involve technical staff directly
involved in construction inspections to help verify indi-
vidual disbursement requests. Technical staff can pro-
vide additional information on program-approved
change orders, work completed since prior inspection,
and knowledge of any observed deficiencies. This infor-
mation can help SRF program staff to accurately
approve individual requests for reimbursement.
EPA Oversight of Fund Disbursements. During the
annual review process, EPA is required to ensure each
state maintains an appropriate level of control over all
SRF Fund disbursements. During onsite visits, EPA will
select a sampling of project level cash draws for review.
EPA uses this information to verify that the state is fol-
lowing all requirements, including formal rules for cash
draw, and conducting an appropriate level of technical
and administrative oversight to verify disbursement
requests. Should EPA discover any occurrence of an
improper payment, either through an onsite sample or
as identified in the annual program audit, the state must
identify all steps taken (or planned to be taken) to cor-
rect for any such identified inaccuracy.
3.13.4
Formal Cash Draw Procedures
for Loan Disbursesments
Calculating the Proportionate Federal Share. The state
DWSRF programs are comprised of both state and feder-
al funds. When a loan disbursement request is submitted
to the SRF program, both state funds and federal funds
may be used to honor the request. By law, state pro-
grams are only authorized to draw the appropriate pro-
portional federal share of all eligible incurred project
costs from the Federal Treasury. Cash draws of federal
funds may only occur for those projects with executed
loan agreements. The calculation of the federal propor-
tional share is described in detail through the "Guide to
Using EPA's Automated Clearing House for the
Drinking Water State Revolving Fund Program" (EPA-
832-B98-003). The newest system for accessing federal
funds is the ASAP system, or the Automated Standard
Application for Payments. The proportionality rules
and processes described for accessing funds through the
federal cash draw system are similar under ASAP to
those under the Automated Clearing House system.
a. . . By law., state programs are only
authorized to draw the proportional
federal share of all eligible costs from the
Federal Treasury."
Establishing the Cash Draw Ratios. In general, cash
draw ratios are established at the time of the capitaliza-
tion grant award. Establishing formal cash draw ratios
ensures both federal and state funds are readily avail-
able as costs are incurred. Formal steps involved dur-
ing the cash disbursement process include: approving
the formal disbursement request based on an allowable
costs determination; calculating the proportionate fed-
eral share for all verified disbursements; and following
an approved funds disbursement mechanism (e.g., the
ASAP process).
Below is a sample calculation to determine the appro-
priate federal cash draw ratio for project disbursements.
In general, the cash draw ratio for federal funds
is equivalent to:
$ Federal Share of Project Costs / $ Total Project
Disbursement
Where the federal share is equivalent to:
The Capitalization Grant -
Set-Asides +/- SRF Transfers
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For example, if a DWSRF program takes the maximum
thirty-one percent of federal funds for set-asides, the fed-
eral cash draw ratio in this example would be 77.5%. (See
specific calculations used to illustrate this example below.)
Given Information:
Capitalization Grant = $100
State Match = $20
Set-Asides Reserved = 31%
Determining the Federal Cash Draw Ratio:
$ Federal Share of Project Costs = $69
[$100 (Capitalization Grant) - $31 (Set-Asides)]
$ Total Project Disbursement = $89
[$69 (Federal Share) + $20 (State Match)]
In this example, the cash draw ratio for
federal funds is equivalent to 77.5%
[$69 ($Federal Share of Project Costs) /
$89 ($Total Project Disbursement)] = 0.775
Federal Cash Draw through the DWSRF Set-Asides.
Unique to the DWSRF set-aside accounts, cash draw
ratios are set to one-hundred percent - as one-hundred
percent of the funds used for expenditures through these
accounts are federal funds. One exception is the DWSRF
State Program Management set-aside as programs may
use state funds to satisfy the state one-to-one match
requirement. (For more information on the match
requirement through the State Program Management set-
aside, see Section 4.1.3 of this handbook.)
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KEY RESPONSIBILITIES: CHAPTER THREE: 3.13
Construction Activities and Loan Disbursement
EPA
• During the annual review process, EPA is required to ensure each state maintains an appropriate level of control
over all SRF Fund disbursements.
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• In general, cash draw ratios are established at the time of the capitalization grant award. EPA must provide prop-
er oversight to ensure the state DWSRF program is in compliance with federal cash draw proportionality require-
ments.
State Program Office
• State programs require all project borrowers to designate a certified project engineer to provide continuous over-
sight throughout the project construction process.
• If a system fails to adhere to the original project completion schedule, fails to meet ongoing compliance under
SDWA, or fails to show appropriate technical, financial, or managerial capacity, state programs are required to
enforce remediation requirements.
• DWSRF programs are required to verify all projects receiving assistance from the Fund are using these monies for
eligible purposes.
• By law, state programs are only authorized to draw the appropriate proportional federal share of all eligible
incurred project costs from the Federal Treasury.
EPA
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3.14
Project Completion and Close-Out
3.14.1
Final Construction Inspection
After project construction is complete and before final
reimbursement funds are released to the program bor-
rower, a final construction inspection must be complet-
ed. This final inspection is carried out to ensure project
funds have been used for eligible purposes and the proj-
ect is complete according to original plans and specifica-
tions and all state approved change orders. Typically a
state program staff engineer will complete this final
onsite inspection in combination with the borrower-des-
ignated project engineer.
Releasing Final Project Funds. Following a final con-
struction review, the loan recipient is provided with all
remaining project disbursements according to approved
project disbursement requests. In many cases, state
DWSRF programs will hold five percent or ten percent
of remaining loan funds pending final inspection. In
other cases, programs will only hold the amount of the
final disbursement request before signing off that the
project is complete according to all requirements. The
purpose of withholding some funds before final verifica-
tion is to encourage timely completion of the project
and initiation of operations.
3.14.2
General Timing and Requirements
for Loan Repayment
Initiating Loan Repayments. After a project is com-
plete and has initiated operations, the loan recipient is
required to begin repayments within one year. All bor-
rower repayments must return to the Fund (both prin-
cipal and interest amounts), and all repayments must
return within twenty years.
KEY RESPONSIBILITIES: CHAPTER THREE: 3.14
Project Completion and Close-Out
EPA
• EPA is responsible for oversight to ensure state programs are complying with applicable federal requirements
throughout the project completion and close-out processes.
State Program Office
• After project construction is complete and before final reimbursement funds are released to the program borrow-
er, a final construction inspection must be completed.
• After a project is complete and has initiated operations, the loan recipient is required to begin repayments within
one year.
Capitalization
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CHAPTER
Funding through the DWSRF Set-Asides
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KEY POINTS IN CHAPTER 4
• DWSRF programs may provide direct program
assistance in the form of grants, technical
assistance to small systems, and other types of expendi-
tures through set-asides.
• Four types of set-asides have been authorized by
Congress, administration, technical assistance to small
systems, state program management, and local assistance
and support for other state programs.
• All set-aside activities must coordinate with the overall
goals of the DWSRF.
• State programs must follow specific requirements to plan
and account for expenditures related to DWSRF set-aside
activities.
4.1
Four Types of Set-Asides
DWSRF programs are uniquely structured to allow
states the option of providing direct program assistance
in the form of grants, technical assistance to small sys-
tems, and other types of expenditures through a sepa-
rate mechanism known as the DWSRF set-asides.
Four types of set-asides have been authorized by
Congress and these include:
• DWSRF program administration,
• Technical assistance to small systems,
• State program management support, and
• Local assistance and support for other state programs
After a state receives its capitalization grant, a certain
portion may be moved to these separate accounts for
additional uses of the program funds. In general, assis-
tance through the DWSRF set-asides is provided in the
form of grants to drinking water systems, technical
assistance through the program staff office and third
party contracts, and for program administration activi-
ties, including salary requirements for DWSRF program
staff. Additional requirements and restrictions on the
uses of these funds are described in further detail below.
4.1.1
Administration and Technical Assistance
States may reserve up to four percent of each capitaliza-
tion grant for administrative expenses and for technical
assistance. To date, all fifty-one SRF programs are
reserving funds for use under this set-aside. Eligible
expenses include all types of administrative expenses
necessary to implement the state DWSRF loan pro-
gram, including administration of the set-asides.
Sample activities may include loan portfolio manage-
ment, technical reviews of preliminary engineering
reports, the preparation of the annual capitalization
grant application, and holding meetings with potential
borrowers to discuss the status of a loan application.
In addition to reserving funds under this set-aside for
program administration activities, the DWSRF may pro-
vide direct technical assistance to the borrowing com-
munity. Only a handful of states have provided technical
assistance through the four percent administration set-
aside to date. These include Arkansas, Virginia, New
Mexico, Oregon, and South Carolina. Programs may
use these resources to develop multimedia products or
to provide direct technical assistance to borrowers, for
example, through face-to-face meetings. Examples
include the development of printed materials, public
service announcements, video tapes, or other media to
provide information on water conservation activities and
to provide direct assistance to applicants to ensure the
detailed application is complete and accurate.
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4.1.2
Small System Technical Assistance
In many cases, small systems may not be able or eligible
to apply for loan assistance through the DWSRF Fund
due to lack of technical, financial, or managerial capacity.
In these cases, small systems may benefit from extra
technical assistance provided through the DWSRF set-
asides to achieve the compliance level required for an
SRF loan. State programs may reserve up to two per-
cent of each capitalization grant for direct assistance to
small systems. Assistance activities can include the com-
pletion of an engineering feasibility study to highlight
operational areas for improvement, additional assistance
in completing an environmental review and developing
cost estimates during the planning process, or may
include direct assistance in completing an application for
DWSRF funds. Technical assistance through this set-
aside can be provided directly by SRF program staff or a
third party contractor to carry out assistance activities.
4.1.3
State Program Management
State DWSRF programs are given the additional author-
ity to provide assistance for other drinking water-related
activities under the State Program Management set-
aside. Programs may reserve up to ten percent of the
federal capitalization grant for several types of activities
including 1) administrative assistance to the PWSS pro-
gram; 2) technical assistance for SWP activities; 3) assis-
tance for capacity development initiatives; and 4) sup-
port for state operator certification programs.
Nationally, programs have reserved approximately five
percent of the allowable ten percent maximum through
this set-aside for these and other types of activities.
Individual project examples eligible through this set-
aside are many, and states continue to strive for innova-
tive uses of these funds. Programs use assistance
through this set-aside to complement existing programs
and to provide training programs or other types of
direct assistance. Sample project activities include the
use of set-aside funds for project inspections, sanitary
surveys, and development of new training manuals or
exams for drinking water system operators.
One-to-One Match Requirement. For all funds reserved
through the State Program Management set-aside, state
programs must provide a direct match at the time of the
grant or as funds are expended. Although states are
required to provide a direct one-to-one match for fed-
eral funds under this set-aside, several options are avail-
able that allow programs to specify in-kind services or
credit in lieu of new cash. Under the DWSRF regula-
tions, programs are allowed the option of using a credit
from state expenditures (match and overmatch) provid-
ed to the PWSS program during FY1993. This credit
may account for up to fifty percent of the match
required under this set-aside. Regulations also allow
these amounts provided by the state to the PWSS pro-
gram during FY1993 to serve as a perpetual credit.
For example, if a state plans to expend $1 million
through this set-aside over the next fiscal year, and they
have a perpetual credit for PWSS expenditures during
FY1993 of $600,000, they may only use $500,000 as
the maximum credit allowable. Again, states may only
use up to fifty percent of the FY1993 expenditures for
the PWSS programs as a credit toward the current
match requirement. In this example, the state program
must provide an additional $500,000 in direct match.
Additional match can be in the form of new cash, credit
for in-kind services, or credit for PWSS overmatch
(only) in the current fiscal year.
It is possible for a state to provide match in the form of
credit for PWSS expenditures and in-kind services with-
out providing any additional match in the form of
direct cash match. It is important to note that the use
of in-kind services encompasses any type of eligible state
activity used to support the implementation of this set-
aside, an example of which is employee salaries.
Questions on the eligibility of potential in-kind services
are answered by EPA on a case-by-case basis. All forms
of match must be approved by EPA through a detailed
set-aside work plan (see Section 4.2.2 for more infor-
mation on developing set-aside work plans) before eligi-
ble for use by the state for State Program Management
expenditures.
4.1.4
Local Assistance and Other State Programs
The Local Assistance and Other State Programs set-
aside allows additional types of DWSRF project assis-
tance as compared to the types of assistance through
the four percent, two percent, and ten percent DWSRF
set-aside accounts. In general, DWSRF set-aside assis-
-------
tance is provided in the form of grants to drinking water
systems, and for technical assistance or other types of
programmatic support expenditures. Through the
Local Assistance and Other State Programs set-aside,
states may also provide loan assistance for certain SWP
activities. In particular, states may provide loans for
implementation activities related to state source water
assessments. These loans may be used for SWP land
acquisition and other types of incentive-based SWP pro-
tection measures. If a state decides to provide these
types of loan assistance options, it must develop an
EPA-approved priority setting process similar to that
created for the Fund (see Section 3.10.1 for more infor-
mation on priority setting). All loan repayments under
this set-aside must return either to the set-aside account
for future loans or to the Fund for DWSRF binding
commitments or other eligible uses of the Fund.
In addition to loan assistance through the Loan
Assistance and Other State Programs Set-aside, states
may provide direct assistance in the form of a grant or
technical support activities in the following areas: 1)
SWP area delineation and assessment5; 2) support for
wellhead protection programs; and 3) technical or finan-
cial assistance related to a capacity development strategy
for eligible drinking water systems, including small sys-
tems. Example activities eligible through this set-aside
may include the development of local SWP ordinances
and implementation of public education programs to
highlight the importance of wellhead protection.
States are limited to a maximum of fifteen percent of
each capitalization grant for these types of activities, and
may use no more than ten percent of each grant for any
one project category through this set-aside. For exam-
ple, states may provide no more than ten percent for
SWP land acquisition loans or direct support for well-
head protection programs.
4.2
Key Requirements and Recommendations
4.2.1
Account Management
Maintaining Separate Accounts. The state grantee has
primary responsibility for proper maintenance of a sepa-
5 Support for source water delineations and assessments were eligible using set-aside
funds from the FY1997 capitalization grant only. All state programs have used funds
for these purposes.
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DWSRF Set-Aside Reference Chart
Amount Statutory Purpose
Citation
Required
Match
Can Authority
Be Reserved
4% 1452(g)(2)
2% 1452(g)(2)
DWSRF Administration & Technical Assistance to PWSs
None
Yes
Small Systems Technical Assistance
Technical Assistance to PWSs Serving<10,000 Persons
None
Yes
10% 1452(g)(2) State Program Management:
1. Administer the State PWSS Program
2. Administer or Provide Source Water Technical Assistance
3. Develop & Implement a Capacity Development Strategy
4. To Develop & Implement an Operator Certification Program
1:1
Yes
15% 1452(k) Local Assistance & Other State Programs: No more than 10% None
of Capitalization Grant Amount Can Be Used for Any One Activity
1. Loans to Acquire Land or Conservation Easements for
Protection of Source Waters
2. Loans to Provide Funding to Implement Voluntary, Incentive-
Based Source Water Quality Protection Measures
3. Assistance to PWS as Part of Capacity Development Strategy
4. For 1996 & 1997 Only, Assistance to Delineate or Assess
Source Water Protection Areas
5. Assistance to Establish & Implement Wellhead Protection
Programs Under Section 1428
No
-------
1
rate and identifiable DWSRF Fund account. If provid-
ing assistance through DWSRF set-asides, programs
must maintain separate and identifiable accounts for
both Fund activities and set-aside expenditures. If loan
repayments for project assistance through the fifteen
percent Local Assistance and Other State Programs set-
aside are deposited back to the set-aside accounts, over-
sight of these accounts must meet the same manage-
ment requirements as implemented for the Fund.
Coordinating Goals. All set-aside activities must coordi-
nate with the overall goals of the DWSRF. Set-aside
activities are eligible through the program to support
the overall mission of SDWA in accordance with the
requirements for assistance through the Fund. In addi-
tion, all set-aside activities are subject to requirements
for federal crosscutters and environmental review proce-
dures; however, in most cases these requirements will
not pertain to set-aside activities. (See Sections 3.11.2
and 3.11.3 for more information on environmental
review and federal crosscutter requirements.)
4.2.2
Reporting Requirements
Basic Reporting Requirements. State programs must fol-
low specific requirements to plan and account for
expenditures related to DWSRF set-aside activities.
According to the basic requirements for the program,
the level of funds and general descriptions of planned
activities for DWSRF set-asides must be included in the
IUP. Detailed descriptions and budget information are
included in formal set-aside work plans. Follow-up
reporting on the actual use of DWSRF set-aside expen-
ditures, in comparison to planned activities, is included
in the Annual/Biennial report or a separate set-aside
activity update. Other types of reporting, at the request
of the Region or initiative of the state, can supplement,
but not substitute for these required reporting activities.
Set-Aside Work Plans. Detailed requirements for set-
aside work plans are included in the final DWSRF pro-
gram regulations. According to these original require-
ments, all set-aside work plans must include six specific
sections of information. These sections include: 1) a
thorough description of planned activities and identifica-
tion of the goals and objectives for each set-aside; 2) an
identification of roles and responsibilities for all imple-
menting parties; 3) the annual and cumulative funding
amount and percent of the capitalization grant reserved
for each activity; 4) expected outputs, outcomes, and
deliverables; 5) projected work years to completion and
a schedule of deliverables; and 6) a description of how
the state will evaluate success. Regions may request
additional information or specify certain formats for
work plans. For example, states may be requested to
briefly discuss the relationship of work identified in the
current work plan with ongoing work in prior year work
plans and work plans associated with the PWSS, security,
and operator training grants. In addition, a region may
request information from a state on what steps a state
may take to expedite work if large unexpended balances
of set-aside funds have accumulated.
Set-aside work plans are due in accordance with sched-
ules identified by EPA Regional staff. EPA must
approve all work plans and work plan amendments.
States must prepare a work plan for all set-asides,
except the four percent administration set-aside. No
work plan is required for administrative activities, unless
the four percent set-aside is also used for technical assis-
tance. In this case, a work plan would only be required
for the portion of funds used for technical assistance.
K. . . all set-aside work plans are due
within ninety days of the capitalization
grant award, unless a shorter schedule
is approved . . ."
Acceptable Formats. Set-aside work plans come in a
variety of formats. Plans may be developed according
to an individual grant, on an annual basis (even if the
state does not receive a grant in the current year), or
according to a multi-year format. Regulations limit
multi-year work plans to no more than four years.
Planning over the course of multiple years is helpful if
funded activities are expected to take several years to
complete with the use of multiple capitalization grants
and other funding.
In addition to different reporting schedules, states may
develop work plans based on each individual set-side by
creating a separate set-aside work plan for the two per-
-------
cent, four percent, ten percent, and fifteen percent set-
asides, or by developing individual work plans by cate-
gory of funding. For example, a state may develop a
separate work plan for Capacity Development and
another for Operation Certification or SWP activities.
Annual/Biennial Reports and Set-Aside Activity Reports.
State programs must report on set-aside use through the
Annual/Biennial Report or another type of set-aside
activity report (also called a Set-Aside Performance
Report), as agreed upon with the EPA Region.
Information reported through these documents allows
the states and others to compare the planned use of SRF
funds for set-aside activities with actual expenditures of
funds for project assistance. Funding information report-
ed through the set-aside activity reports or
Annual/Biennial Reports should reconcile with the pre-
vious year's IUP and work plans. Any discrepancies
should be explained within these documents.
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KEY RESPONSIBILITIES: CHAPTER FOUR
Funding Through the DWSRF Set-Asides
EPA
• Several options are available that allow programs to specify certain in-kind services in lieu of new cash to satisfy
the one-to-one match requirement under the State Program Management set-aside. Questions on the eligibility
of potential in-kind services are answered by EPA on a case-by-case basis.
• EPA must approve all set-aside work plans and work plan amendments.
• As agreed upon with the EPA Region, state programs must report on set-aside use through the Annual/Biennial
Report or additional set-aside activity report.
• EPA will negotiate with the program office on corrective action measures, if necessary, to reduce large balances of
unexpended set-aside funds.
State Program Office
• No work plan is required for administrative activities, unless the four percent set-aside is also used for technical
assistance.
• For funds reserved through the State Program Management set-aside, state programs must provide a direct
match at the time of the grant or as funds are expended.
• Through the Local Assistance and Other State Programs set-aside, states may also provide loan assistance for cer-
tain SWP activities. If a state decides to provide loan assistance, it must develop an appropriate priority setting
process. All loan repayments must return either to the set-aside account for future loans or to the Fund.
• States are limited to a maximum of fifteen percent of each capitalization grant for activities funded through the
Local Assistance and Other State Programs set-aside and may use no more than ten percent of each grant for any
one project category.
• If providing assistance through DWSRF set-asides, programs must maintain separate and identifiable accounts for
Fund activities and set-aside expenditures.
• All set-aside work plans are due within ninety days of the capitalization grant award, unless a shorter schedule is
required by the EPA regional office.
• State programs must report on set-aside use through the Annual/Biennial Report or another type of set-aside
activity report as agreed to with the Regional Office.
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1
CHAPTER
State Follow-Up Activities
KEY POINTS IN CHAPTER 5
• The Annual/Biennial Report documents the actual activi-
ty of the DWSRF program for the prior year or two
years.
• Program audits perform a comprehensive check of
DWSRF operations. These include the loan Fund, set-
aside accounts, and administrative or fee accounts.
• Under the Single Audit Act, all nonfederal entities that
expend more than $500,000 of federal dollars in any
fiscal year are required to conduct a Single Audit.
• State programs must report on set-aside use through an
annual set-aside performance status report or the state
DWSRF Annual/Biennial Report.
• DWNIMS is used to compile a comprehensive and con-
sistent set of data quantifying SRF activity.
5.1
State Develops the DWSRF
Annual/Biennial Report
5.1.1
Purpose
Each DWSRF program must submit a Biennial Report
to its EPA regional office detailing the state's perform-
ance and its compliance with DWSRF regulations and
capitalization grant requirements. Many states, especial-
ly those where management of the CWSRF and
DWSRF is coordinated, choose to report annually
instead of biennially. The report may also be submitted
as a combined CWSRF and DWSRF report. In this
case, all CWSRF and DWSRF financial activities must be
clearly and separately reported.
5.1.2
Key Requirements and Recommendations
The Annual/Biennial Report documents the actual activ-
ity of the DWSRF program for the prior year or two
years. It describes the program's progress toward short-
term and long-term goals as described in the IUP. States
are also required to address progress toward agreed upon
outputs and outcomes as defined in their IUP, including
satisfactory explanations, as necessary, as to why specific
outputs and outcomes were not achieved.
Reporting also includes detailing the timely and expedi-
tious use of funds, binding commitments and loans exe-
cuted, and all types of assistance provided. Specifically,
the state must demonstrate that it has provided funding
to projects consistent with the project priority lists and
that it adhered to its project bypass process. In addi-
tion to the accompanying DWNIMS reports (see
Section 5.4 for more information on DWNIMS); the
Annual/Biennial Report should include financial state-
ments and an overall assessment of the financial health
of the DWSRF program. A region may specify a partic-
ular format for the report, including financial tables. It
should also cross-reference the independent audit
report (see Section 5.2 for more information on SRF
program audit procedures).
In addition to demonstrating compliance, the report
needs to show which projects satisfy the various federal
and state requirements, differentiating between costs
paid out of the capitalization grant and state match and
those paid by other monies, including repayments and
interest earnings, in the Fund. The DWSRF program
should demonstrate compliance with the specific assur-
ances as stated within the IUP. Most importantly, all
costs incurred must be eligible under SDWA. The
Annual/Biennial Report must also report on the status
of the set-aside accounts separately. One EPA grant
-------
condition requires that each DWSRF program illustrate
the public health benefits for its activities and progress
in achieving outputs and outcomes.
In addition to these regular components, the report
should also follow-up on previous PER findings and
evaluate any other program changes. Taking a long-
term view is important for EPA, the financial communi-
ty, state legislators, and others, as this is a public docu-
ment. Reporting requirements will continue to exist as
long as the DWSRF program operates, however they
are expected to be reduced after the award of the last
capitalization grant, as several program requirements
will no longer apply.
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KEY RESPONSIBILITIES: CHAPTER FIVE: 5.1
State Develops the DWSRF Annual/Biennial Report
EPA
• Set a schedule for receipt of the Annual/Biennial Report with each state DWSRF program, and notify the state
of any changes to reporting requirements.
• If desired, the regional office may specify a preferred Annual/Biennial Report format.
State Program Office
• Submit an Annual/Biennial Report to EPA detailing DWSRF program activity over the past year(s), including
project funding commitments, financial statements, progress in achieving outcomes and outputs, resolution of
prior year PER issues, and expected program changes.
• In the Annual/Biennial Report, demonstrate compliance with the DWSRF regulations and capitalization grant
requirements.
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1
5.2
State Completes and Submits the
DWSRF Annual Audit to EPA
5.2.1
Purpose
Program financial audits help to ensure that DWSRFs
operate within the law, comply with federal require-
ments, use appropriate accounting and fiscal procedures,
and minimize the risk of waste, fraud, and abuse. EPA
uses audited financial statements to determine if the
program is operating as intended, and to gather infor-
mation necessary to report to Congress. Prior period
audit reports are reviewed by the Region as a confirma-
tion of previously reported financial information and
information reported through the Annual and Biennial
Reports. Any identified inconsistencies should be
addressed and resolved.
States that conduct audits under the DWSRF program
can use administrative funds from the four percent set-
aside account to pay for them.
5.2.2
Key Requirements and Recommendations
Annual Program Audits. Independent financial audits
of State DWSRF program accounts are conducted by
nearly every state program.
Program audits perform a comprehensive check of
DWSRF operations rather than individual capitalization
grants. These include the loan Fund, set-aside
accounts, and administrative or fee accounts. Auditors
first express an opinion regarding the fairness of the
financial statements and determine whether the state
has used accounting and fiscal procedures that conform
Sample Financial Statement
Financial Information for a Sample State's DWSRF
(Millions of Dollars)
2004
2005
2006
Cash Flows
Operating Activities
Interest Received on Loans
Loan Principal Repayments
Total Loan Disbursements (incl. amounts forgiven)
Transfers - Other SRF Funds
Federal Capitalization Grants - Cash Draws
State Match Deposits - Excluding Bonds Paid by SRF
Additional State Contributions
Net Cash Provided by Operating Activities
Noncapital Financing Activities
Gross Leverage Bond Proceeds
Leverage Bond Proceeds (Gross less Issuance Expense)
Interest Paid on Leveraged and State Match Bonds
Net Refunding Bonds and Funds Used for Refunding
State Match Bond Proceeds (Gross less Issuance Expense)
Repayment of Leveraged Bond Principal
Repayment of State Match Bond Principal
Net Cash Provided by Noncapital Financing Activities
Investing Activities
Interest Received on Short-term Investments
Interest Received on Debt Service Reserves
Deposits to Debt Service Reserve for Match Bonds
Deposits to Debt Service Reserve for Leverage Bonds
Net Cash Provided by Investing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Beginning Balance - Cash and Cash Equivalents
Ending Balance - Cash and Cash Equivalents
1.8
3.4
(13.0)
0.0
12.7
2.7
0.0
7.5
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.4
0.0
0.0
0.0
0.4
7.9
27.0
34.9
1.6
3.7
(14.0)
0.0
13.5
5.1
0.0
9.9
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.4
0.0
0.0
0.0
0.4
10.3
34.9
45.2
1.9
4.5
(18.7)
0.0
18.0
2.8
0.0
8.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.5
0.0
0.0
0.0
0.5
8.9
45.2
54.1
Ending Balance - Undrawn Federal ACH Balance
15.9
12.1
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to GAAP and that allow for the proper measurement of
the flow of funds into and out of the DWSRF accounts.
They then review the balance sheet accounting for all the
DWSRF assets, liabilities, and net assets in order to
report on the internal controls related to the financial
statements. This is part of a broader check to ensure
that the state has appropriate internal controls and
accounting procedures to prevent waste, fraud, and
abuse.
Next, the auditors express an opinion as to whether the
state has complied, in all material respects, with laws,
regulations, and provisions of the SRF capitalization
grants and other applicable federal laws and bond inden-
tures. The audit will detail the state's cash management
practices and note whether the DWSRF is earning a rea-
sonable rate of return on invested funds. The audit
should document any identified erroneous payments,
cash draws, disbursements, and the steps taken (or
planned) to correct such occurrences.
States must submit completed audit reports and man-
agement letters to EPA for review and for use during
the state annual review process. The EPA Region uses
these audit reports, which are hopefully complete by the
time of the Annual Review, to evaluate program man-
agement.
The Single Audit. Under the Single Audit Act and
OMB Circular No. A-133, states are required to con-
duct an annual audit, known as the Single Audit. The
Circular implements the Single Audit Act amendments
of 1996 and requires all nonfederal entities that expend
more than $500,000 of federal dollars in any fiscal year
to conduct a Single Audit.
In addition to the DWSRF program financial audit, loan
recipients that expend more than $500,000 of federal
assistance in a single fiscal year must also conduct an
audit under the Single Audit Act. States must ensure all
DWSRF program recipients that meet these criteria are
conducting Single Audits, adhere to GAAP accounting
requirements, and work to resolve any issues identified
through the audit process.
Information derived from the Single Audit can subse-
quently be used for financial audits of the DWSRF pro-
gram. Set-asides used for programmatic purposes may
also be covered by the Single Audit.
Format of the Single Audit Report. The Single Audit
report may be contained within one combined report
or several separate reports.
In general, the Single Audit report will contain
the following information:
• An opinion on whether the financial statements are
fairly presented in accordance with GAAP,
• Status of internal controls relative to the financial
statements and major programs,
• Assessment of recipient compliance with laws,
regulations, and terms of federal assistance awards,
and
Schedule of findings and questioned costs.
Although the Single Audit alone is not traditionally
used to fulfill DWSRF audit requirements, for those
states that do not conduct an annual independent audit
and do not have a recent EPA OIG Audit available,
EPA regional offices will need to pull as much informa-
tion as possible from the Single Audit report to verify
program compliance.
(For more information concerning SRF audits, see the
U.S. EPA Audit Guide for Clean Water and Drinking
Water State Revolving Fund Programs, September
2002.)
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I KEY RESPONSIBILITIES: CHAPTER FIVE: 5.2
| State Completes and Submits the DWSRF Annual Audit to EPA
X,
ISl
$ EPA
_g • Review the most recent independent audit, OIG audit, or Single Audit for each DWSRF program to determine
compliance and proper financial management and to check for consistency with the state's previous reporting.
• Ensure that the state has received and reviewed single audits from the designated DWSRF loan recipients.
State Program Office
• Arrange for an independent audit or Single Audit of program operations to document compliance with all neces-
sary authorities, internal controls on financial transactions and reporting, and GAAP.
• Work with the auditor to conduct the audit and to discuss/resolve findings.
• Submit the auditor's report, including audited financial statements, to EPA for review.
• Collect Single Audits from loan recipients covered by the Single Audit Act. Follow-up on audit findings if relat-
ed to the recipient's ability to repay the loan.
62
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5.3
Submitting Annual Set-Aside
Performance Status Reports
5.3.1
Purpose and Requirements
Annual set-aside performance status reports (also known
as set-aside activity reports) may be developed to provide
an annual update and description of activities conducted
and funds expended under each individual set-aside
account. These reports are optional, unless required by
the Region; however, a state program must report on
set-aside use either through this type of report or the
state DWSRF Annual or Biennial Report. This docu-
mentation allows the states and others to compare the
planned use of SRF set-aside funds with actual expendi-
tures. (See Section 4.2.2 for more information on set-
aside planning and reporting requirements.)
The set-aside status reports should also include a dis-
cussion of planned versus actual expenditures of set-
aside funds. If there is a balance of unexpended funds
which exceeds the amount expected based on planned
schedules in the approved work plans, the state should
identify measures it will take to reduce the excess
amount. Such measures could include steps to expe-
dite planned work, identification of additional tasks
(e.g., revised work plans), transfer of funds to the other
set-aside categories (if ceilings are not already reached),
and transfer of excess amounts to the infrastructure
Fund.
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KEY RESPONSIBILITIES: CHAPTER FIVE: 5.3
Submitting Annual Set-Aside Performance Status Reports
EPA
• EPA must ensure proper oversight of state DWSRF set-aside reporting activities. State programs are required to
report on set-aside use either through an annual set-aside performance status report or through the DWSRF
Annual/Biennial Report.
State Program Office
• State programs must report on set-aside use through an annual set-aside performance status report or the state
DWSRF Annual/Biennial Report.
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1
5.4
Reporting for the Drinking Water
National Information Management
System (OWNIMS)
5.4.1
Purpose and Requirements
The DWNIMS is used to compile a comprehensive and
consistent set of data quantifying SRF activity. DWN-
IMS data can be used to provide credible reports and
analysis of program activity; monitor progress in meet-
ing program goals and objectives; and to support efforts
in financial planning. Information collected through
the DWNIMS system include details on project assis-
tance by category (e.g., system compliance with
SDWA), assistance by population served, information
on awards and expenditures through the DWSRF set-
asides, and information on the DWSRF financial indica-
tors. States use the DWNIMS data to track program
progress over time.
DWNIMS data reports are also used by regions during
the Annual Review process to assess the financial health
of the program and to report on program activity meas-
ures.
Program Activity Measures (PAMs). According to fed-
eral requirements, EPA program offices are required to
link DWSRF capitalization grants to EPA's Strategic
Plan. Regional offices work with states to ensure well-
defined outputs and outcomes are addressed within cap-
italization work plans. In relation to national
reportable outputs and outcomes, four PAMs are iden-
tified for the DWSRF program. These include:
• Annual percentage of assistance agreements to bring
entities into compliance,
• Fund utilization rate [cumulative loan agreement dollars
compared to cumulative funds available for projects],
• Return on federal investment [cumulative dollar
amount of assistance disbursements to projects divid-
ed by cumulative federal outlays for projects], and
• Cumulative number of project completions
5.4.2
General Schedule
The DWNIMS reports program data from July 1, 1997
through June 30th of the current year. Data is collect-
ed from Excel spreadsheets or through the internet (at
http://www.dwsrf.net) at the State's option.
EPA began work to develop DWNIMS during the late
1990s. A pilot effort was launched in six states includ-
ing Kansas, Maine, Maryland, Ohio, Oregon, and
Virginia. A final version of the system was initiated in
2000 by EPA. The new system contained data collec-
tion requirements for over four-hundred data elements
for each state program. Today, all states report informa-
tion for the uses of their DWSRF funds to DWNIMS.
The DWSRF data reporting period ends annually on
June 30th and final numbers are submitted to EPA
through an established website by a September dead-
line. States may report only information for the most
recent fiscal year and are requested to submit any
changes or corrections to the prior year only.
5.4.3
Use of the DWSRF Financial Indicators
There are seven financial indicators calculated through
DWNIMS. These figures help to give EPA and the
states a means to track program progress and explore
initial assessments of overall program health.
Information is collected for the following types of
DWSRF indicators:
• Return on federal investment,
• Assistance provided as a percent of funds available,
• Disbursements as a percent of assistance provided,
• Additional assistance provided due to leveraging,
• Net return/loss after repaying match bonds and for-
giving principal,
• Net return on contributed capital, and
• Set-aside spending rate
Programs use these indicators to develop various
assumptions on program health and to assist during the
financial planning process for the program. EPA also
uses these indicators to help prepare the DWSRF PART
response for OMB. As described earlier in Section
2.1.1 of this handbook, PART is a series of questions
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that seek to assess the purpose, management, and per-
formance of individual programs, including the
DWSRF. Programs must demonstrate that their pur-
pose is clear, that they are results-oriented, that they are
well managed, and that they achieve intended results.
Program effectiveness, as evaluated through the PART
process, also plays a role during the development of the
President's Budget by providing relevant information
for allocating limited funds to programs that can best
demonstrate success.
KEY RESPONSIBILITIES: CHAPTER FIVE: 5.4
Reporting for the Drinking Water National Information Management System
(OWN IMS)
EPA
• EPA must ensure states report timely and accurate information through the DWNIMS data system.
State Program Office
• The DWSRF data reporting period ends annually on June 30th, and final numbers are submitted to EPA through an
established website by a September deadline.
• States may report only information through DWNIMS for the most recent fiscal year and are requested to submit
any changes or corrections to the prior year only.
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X,
VC
1
CHAPTER
EPA Oversight Activities
KEY POINTS IN CHAPTER 6
• The annual review is central to EPA's oversight of the
DWSRF program and thus encompasses all aspects of a
state's operations.
• EPA's general responsibilities for the annual review begin
with an assessment of the state's progress and perform-
ance in achieving goals and objectives
identified in the IUR
• In addition to the annual reviews of state DWSRF pro-
grams, EPA Headquarters also conducts oversight reviews
of each individual regional office.
6.1
State and EPA Annual Review Process
6.1.1
Purpose
The main purposes of an annual review are to evaluate
the DWSRF program's financial and operational health
and check its compliance with relevant statutes, regula-
tions, and grant conditions. The review focuses on the
DWSRF's activity over the previous year and includes
actions and agreements that affect the program. EPA
regional staff generally conducts part of the review at
the state offices and use the visit as an opportunity to
assess the state's capacity to run its program. Opening
and exit interviews, as well as specific meetings to dis-
cuss new requirements and initiatives, are a valuable
means of improving DWSRF management in the short-
and long-term.
6.1.2
EPA Responsibilites
The annual review is central to EPA's oversight of the
DWSRF program and thus encompasses all aspects of a
state's operations. The 2004 Annual Review Guidance
for Clean Water and Drinking Water State Revolving
Fund (SRF) Programs provides a comprehensive discus-
sion of core review elements and a checklist for EPA
regional staff to complete during the review and submit
to EPA Headquarters with their PER. Beyond these
core components, regions may emphasize certain ele-
ments of the DWSRF program based on situational
knowledge and past reviews. To help ensure that the
state and EPA are on the same page, regions are encour-
aged to share a draft of the PER with the state and to
discuss findings and proposed action items clearly.
EPA's general responsibilities for the annual review
begin with an assessment of the state's progress and
performance in achieving goals and objectives as identi-
fied in the IUP and reported through the state's
Annual/Biennial Report. EPA also reviews a selection
of programmatic and financial project files, often onsite
at the state program offices, to determine program
compliance with federal requirements, adequacy of
environmental reviews, and eligibility of program recip-
ients and assistance activities.
Specific review activities are used to ensure:
• Program operation is in accordance with established
OA (if applicable),
• Program is achieving the intent of Section 1452 and
other pertinent sections of SDWA,
• Program coordinates with other water quality and
drinking water programs in the state, as appropriate,
• Program is in compliance with Part 31 of the general
grant regulations and the provisions of the capitaliza-
tion grant agreements, and
• Assistance activities are eligible through the DWSRF
program
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General Steps in Annual Review Process from State Perspective
Submittal of Annual/Biennial Report
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I
Preparation for EPA On-Site Visit
Facilitate EPA On-Site Visit
Preparation of Annual/Biennial Report
Receipt and Comment on
Program Evaluation Reports
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Figure: General steps in the annual review process from a state perspective from submittal of annual/biennial report to state receipt and
comment on Program Evaluation Report.
Additional focus areas include EPA's annual review of
the financial status and performance of the Fund and
set-aside accounts. Financial review of the Fund
includes assurance of state match, assessment of binding
commitment requirements, use of appropriate cash draw
procedures, compliance with audit requirements, use of
appropriate assistance terms and fees, and proper assess-
ment of borrower creditworthiness. EPA also confirms
that the state is completing all Federal Cash Transaction
Reports (FCTRs) and Financial Status Reports (FSRs) as
required by the EPA Office of Grants and Debarment.
EPA's review of the DWSRF set-aside accounts includes
an evaluation of work completed as defined through the
set-aside work plans, assessment of adherence to federal
requirements, and evaluation of overall set-aside expen-
diture rates.
In addition to EPA's review of financial and program-
matic requirements for the DWSRF program, the EPA
regional review team will perform an examination and
follow up on any open audit findings and check the sta-
tus of any prior year PER recommendations. Finally,
EPA may note state progress and initiatives with regard
to the public health benefits of the program and look
for opportunities to improve overall management of
DWSRF programs, including marketing efforts, infor-
mation systems, and strategic planning.
6.2
EPA Regional Review Process
6.2.1
Purpose
In addition to the annual reviews of state DWSRF pro-
grams conducted by EPA regional offices, EPA
Headquarters also conducts periodic oversight reviews of
each individual regional office. These reviews focus on
ensuring EPA regional staff is conducting an appropriate
level of management oversight for each state DWSRF
program in their jurisdiction. These reviews take into
consideration how the EPA regional office tracks state
program activities, ensures proper use of federal funds,
and conducts annual DWSRF program reviews.
EPA Headquarters works with the region to discuss each
state program individually with a highlight on program
performance and successful public health protection.
Additional topics of review include:
• PER follow-up,
• Review of audit findings,
• Financial management of the program,
• Set-aside utilization,
• Program pace,
• Terms and conditions of assistance,
• IUP goals,
• Priority list development and actual projects funded,
• Coordination between the State DWSRF and PWSS
program,
• Reporting through DWNIMS, and
• Status of required work plans and other reports
The EPA Headquarters review team provides oversight
responsibilities to ten EPA regional offices. In turn,
these regional offices oversee all fifty-one state DWSRF
programs. This unique national perspective helps EPA
Headquarters better assist the EPA regional offices.
EPA Headquarters often provides valuable solutions
and recommendations that help improve program assis-
tance and oversight activities. On average, the EPA
Headquarters review team visits approximately five EPA
regions per year.
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I KEY RESPONSIBILITIES: CHAPTER SIX
u
EPA Oversight Activities
vo
I EPA
-= • Conduct the annual review of each DWSRF program to assess performance and to ensure compliance with
SDWA, the DWSRF regulations, the grant management post-award monitoring requirements, and applicable
bond indentures.
• Assess the financial health and management capacity of each DWSRF, working with the state to improve program
operations.
• Document and work to resolve any findings of noncompliance or concerns about DWSRF program management.
• Participate in EPA Headquarters reviews of each EPA regional office to discuss DWSRF program performance
and compliance.
State Program Office
• Submit the Annual/Biennial report and supporting documents to EPA in accordance with the agreed-upon
schedule.
• Provide project files, documented procedures, and staff time to facilitate EPA's annual review.
• Comment on EPA's draft PER and work with regional staff to finalize this document.
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CHAPTER
Revisiting the Program Structure
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KEY POINTS IN CHAPTER 7
• To assess SRF financial performance, EPA has provided
tools to assist state programs in conducting SRF
strategic planning, including the SRF Fund Management
Handbook.
• Financial planning activities help the SRF reevaluate
program goals and set lending terms for future
assistance.
• The SRF planning model helps states make the best
planning decisions for their Drinking Water SRFs.
7.1
Assessing Implications of Fund
Management Decisions
7.1.1
The SRF Fund Management Handbook
To assess SRF financial per-
formance, EPA has provided
tools to assist state programs
in conducting SRF strategic
planning. For example, the
SRF Fund Management
Handbook, released by EPA
in 2001, provides a "how
to" guide for SRF managers
to conduct SRF strategic
financial planning activities.
The handbook is organized into three sections including
Strategic Management, Fund Management Issues, and
Analytic Tools and Techniques.
SRF Fund Management
Handbook
The Basic SRF Fund Management Model described
through this document provides information on strate-
gic planning, program management, and program eval-
uation. Key objectives for sound fund management
include a goal to fund projects with greatest public
health benefits. The Fund Management Manual fur-
ther describes how to manage the Fund effectively in
order to provide the maximum amount of assistance
over the long-term while maintaining the overall pur-
chasing power of the fund. Financial considerations
discussed through this document include the use of var-
ious types of loan terms, the proper management of
investment returns, the best use of Fund resources, and
an exploration of options in loan portfolio management
approaches. Financial planning activities help the SRF
reevaluate program goals and set lending terms for
future assistance.
7.1.2
SRF Loan Portfolio Analysis
Proper loan portfolio analysis requires a direct under-
standing of the financial conditions for each borrower.
For example, DWSRF programs with loan portfolios that
have a large proportion of financially weaker borrowers
may consider off-setting factors that increase the assur-
ance of repayment. Such factors may include additional
security for loan repayment beyond pledges of revenues
from user charges, such as pledging the full faith and
credit of a community. Loan portfolios should also be
evaluated with respect to loan terms that may affect the
ability of borrowers to make repayments in the future.
For instance, programs should be careful to consider
how the use of "balloon" and interest-only repayment
options may affect the overall health of the Fund.
Assessing the financial condition of the DWSRF loan
portfolio can serve a number of purposes. Proper eval-
uation of the loan portfolio, for example, can serve to
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1
a
assess the likelihood that all outstanding loans will be
repaid on time. Any identified risks or potential default
rates should be incorporated during the financial plan-
ning process. Assessing the loan portfolio can also be
used to provide feedback on a program's financial capa-
bility review process. Analysis of the loan portfolio can
help to determine if DWSRF program procedures are
adequate to appropriately categorize the financial condi-
tion of borrowers.
For additional, more detailed, information on loan port-
folio management and analysis, please refer to EPA's
2001 SRF Fund Management Handbook.
7.1.3
Use of the SRF Planning Models
The SRF Financial Planning Model was developed by EPA
to assist states in assessing both short- and long-term
effects of Fund management decisions. The SRF plan-
ning model helps states make the best planning decisions
for their Drinking Water SRFs. For example, the model
allows state staff to produce output in both reports and
graphs to illustrate the effects of various scenarios on the
ability of the SRF to provide assistance in the present and
future. These outputs include sources and uses of funds,
pro-forma-financial statements, and graphs showing annu-
al project commitments and disbursements.
The SRF Financial Planning Model allows states to
assess the impact of many variables including changes to
the loan interest rate, investment returns, Fund utiliza-
tion rates, the use of leveraging, alternate levels of set-
aside expenditures, and changes to the level of disad-
vantaged community subsidy provided.
Annual Project Disbursements for a Sample State's DWSRF
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
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KEY RESPONSIBILITIES: CHAPTER SEVEN 1
Revisiting the Program Structure ^
00
n
EPA
• To help states assess SRF financial performance, EPA provides tools to assist state programs in conducting SRF ij
strategic planning.
State Program Office
• States use the SRF Financial Planning Model to help assess both short- and long-term effects of Fund manage-
ment decisions. Financial planning activities help states make the best management decisions for their Drinking
Water SRFs.
71
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APPENDIX A
REFERENCES
Cross-Cutting Federal Authorities: A Handbook on
Their Application in the Clean Water and Drinking
Water State Revolving Fund Programs
Unavailable Online
EPA DWSRF Homepage
• Program Guidance
• Fact Sheets and Reports
• Tribal and Territorial Programs
• Program Data
• Related Programs
• Contact Information
Federal Budget
Federal Legislative Information
House Budget Committee
House Committee on Appropriations
PART Process
Senate Budget Committee
Senate Committee on Appropriations
SRF Fund Management Handbook
http://www.epa.gov/safewater/dwsrf.html
http ://www. whitehouse . gov/omb/budget/
http://thomas.loc.gov/
http ://www. house . gov/
http ://appropriations .house .gov/
http ://www. whitehouse . gov/omb/part/
http ://budget.senate .gov/
http ://appropriations .senate .gov/
See EPA DWSRF Homepage
The Drinking Water State Revolving Fund Program:
Financing America's Drinking Water from the Source
to the Tap, Report to Congress
See EPA DWSRF Homepage
Water Infrastructure: Information on Federal and
State Financial Assistance
www.gao.gov/new.items/d02134.pdf
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Does Not Print.
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EPA DISCLAIMER: This document is intended to be purely informational and is based on SDWA provisions,
EPA regulations, guidance, and established policy effective at the time of publication. It does not substitute for
the applicable provisions of statutes, and regulations, guidance, etc., nor is it a regulation itself. Thus, it does not
impose legally-binding requirements on EPA, States, or the regulated community.
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.
EPA-816-B-06-00
October 2006
Printed on Recycled Paper
Office of Ground Water and Drinking Water (4601)
1200 Pennsylvania Avenue, NW
Washington, DC 20460
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