^"^
    -, -3
     DRINKING WATER STATE
       REVOLVING FUND
  increasing impact
       2006 ANNUAL REPORT
                        Ui
                        0

-------
in 2006, the DWSRF programs saw increases in  .  . .
                 FUND UTILIZATION             A

                  Loan commitments and disbursements
                                          A

                             Number of loans
           COORDINATION WITH PRIMACY AGENCIES

           Compliance assistance


                      Population served by systems receiving loan ensuring

                      compliance
                                                      Seepage 15
                 RETURN ON INVESTMENTS
                 Return on federal investment
                                                  Return on state investment
                                                                  Seepage 13
     BORROWER SAVINGS
          Savings over the market rate
                                                     See page 6
                 PROGRAM MANAGEMENT EFFECTIVENESS
                                   Ratio of disbursements to administrative costs
                                                                  Seepage 12
     SET-ASIDE USE
        Set-aside utilization
                                  Systems receiving technical

                                  assistance           see page 24
                             Small system assistance
                                                                  See page 5
                 Disadvantaged communities assistance
                                                     See page 5

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Letter from the Assistant Administrator
2006 in Review	2




2006 Focus Overview	8




     Pace & Efficiency	9




     DWSRF Coordination	15




     Project Priority Lists	19




     Audits	21




Set-Asides in 2006	24




DWSRF Awards for Sustainable Public Health Protection	28




2006 Financial Highlights	33




2006 Financial Statements	36




DWSRF State Agencies	39




Pawtucket Tale..                                      .. back cover

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                               Administrate
Benjamin H. Grumbles
Office of Water
          I am pleased to present the Drinking Water State Revolving Fund's 2006 Annual
          Report. The DWSRF is now a $12.8 billion Federal/State partnership focused on
          protecting human health and supporting the sustainability of our nation's drinking
          water infrastructure.  This report highlights the accomplishments and financial
          position of this exceptional program.

          Since its inception in 1997, the DWSRF has provided assistance to almost
          5,000 projects improving health protection for over 100 million Americans. The
          program has provided over $11 billion in assistance. Nearly 72 percent of
          projects and 39 percent of assistance has been provided to small communities
          (serving <10,000 people). The DWSRF Program is comprised of 51 state
          and territorial  programs, each tailored to meet the unique needs and goals
          of its citizens.  Innovation and flexibility are hallmarks of this program, as the
          numerous examples in this report illustrate.

          Ensuring the long term sustainability of our nation's drinking water infrastructure
          is a key challenge before us.  The DWSRF offers multi-faceted support for
          meeting this challenge. Drinking water utilities have access to low interest loans,
          and states can provide zero interest loans, principal forgiveness, and extended
          repayment periods to disadvantaged communities. Through optional set-asides,
          states can fund programs to protect source waters and to enhance management
          and operations of drinking water utilities.

          I welcome this annual opportunity to share with you the accomplishments  and
          growth that make the DWSRF such an important and effective program.

                                                       Sincerely,
                                                        Benjamin H. Grumbles
                                                        Assistant Administrator
                                                        Office of Water

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2006
              m  review
The performance of the DWSRF programs in
their 10th year was outstanding. Since their
launch in 1997, the increasing impact that the
DWSRF programs have had on public health
and the drinking water industry has never
been greater or more apparent. The 51 state
and territorial DWSRF programs are each
evolving to best meet the investment needs
of their systems to advance the public health
protection objectives of the Safe Drinking Water
Act (SDWA). From a national perspective,
the DWSRF meets or exceeds performance
expectations established by comparable federal
programs.

Impact of the DWSRF

Although great, the impact of the DWSRF is
not in the number of systems that received
a subsidized loan or technical assistance.
Although almost $13 billion in funds were made
available for drinking water infrastructure, the
impact of the DWSRF is not in the savings that
systems have achieved by financing critical
infrastructure projects through the DWSRF.
Although impressive,  the impact of the DWSRF
is not the financial returns on sizeable federal
and state investments. Ultimately, the true
impact of the DWSRF is protecting public
health - fewer people getting dangerously
sick from waterbourne disease, fewer children
suffering from the developmental effects of
lead contamination, and fewer adults facing the
cancers  caused by unsafe drinking water.
             As illustrated in Exhibit 1 below, federal and state
             investments are used by state DWSRF programs
             to provide both subsidized financing and technical
             assistance to water systems. These resources
             provide water systems with the infrastructure
             and support they need to achieve and maintain
             compliance with the drinking water standards
             established under SDWA by EPA to ensure public
             health protection. The impact of the DWSRF,
             therefore, lies in ensuring that people have safe
             drinking water.

             How is Impact Increasing?

             The impact of the DWSRF increased significantly
             in 2006.  This increase had two components.
             First,  the public health benefits generated by the
             DWSRF each year are cumulative. Second, states
             increased the assistance they provided from 2005 to
             2006.

             If a DWSRF loan enables a water system to
             construct a new treatment plant to ensure that
             the system is in compliance, the  new plant begins
             generating public health benefits as soon as it
             begins treating water. These health  benefits do
             not disappear after the first year  but are generated
             continuously for the life of that treatment plant.  The
             impact of the DWSRF accrues each year by adding
             the public health benefits of any  new projects with
             benefits still being created by past projects. As long
             as funds revolve through the DWSRFs and states
             continue to make loans, the impact of the program
             will continue to snowball.
EXHIBIT l
                        Set-Asides
      EPA
  Capitalization
      Grant
   State Match
                        Loan Fund
I
                 Assistance to
              Systems for Planning
                and Management
               Improvements and
                Support for State
                   Programs
                 Loans to Water
              Systems for Drinking
               Water Infrastructure
                                   Loan Repayments
  Improved
Public Health
 Protection.

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This snowball is picking up speed as the
DWSRF programs mature. In 2006, the
DWSRF programs increased their set-aside
spending (see page 24 for more details on the
impact of set-asides), the financing assistance
provided to systems, the number of projects
financed, and assistance to ensure SDWA
compliance over 2005 levels.  The number
of people served by systems receiving DWSRF
assistance to ensure SDWA compliance likewise
increased. EPA and the 51 state programs all
recognize that the funds do the most good funding
projects and set-aside activities. States' programs
have been increasing spending generally across the
board (see Exhibit 2).
EXHIBIT 2
Drinking Water State Revolving Fund
National Performance Summary Statement
Fund Activity - Estimated ($ Millions)

Annual Fund Activity
Federal Capitalization Grants
State Matching Funds
New DWSRF Funds Available for Assistance
Project Commitments (Executed Loan Agreements)
New Set-Aside Funds Available for Assistance
Project Disbursements from the Fund
Cash Draws from Federal Capitalization Grants (Fund)
Cash Draws from Set-Asides
Cumulative Fund Activity
Federal Capitalization Grants
State Matching Funds
DWSRF Funds Available for Assistance
Project Commitments (Execuited Loan Agreements)
Set-Aside Funds Available for Assistance
Project Disbursements from the Fund
Cash Draws for Fund
Cash Draws for Set-Asides
Orange text highlights 2006 increases.
Source: EPA's DWSRF National Information Management System


2006

768.2
156.7
1,642.6
1,670.2
120.6
1,472.6
749.9
118.3

7,333.4
1,751.8
12,830.8
11,029.4
1,190.0
8,480.4
4,683.5
820.8




2005

820.2
166.4
1,463.0
1,461.1
144.3
1,267.5
636.6
114.8

6,565.2
1,595.1
11,188.1
9,359.2
1,074.2
7,007.8
3,933.6
702.5




2004

757.4
218.7
1,617.8
1,610.4
147.5
1,268.9
708.9
112.4

5,745.0
1,428.7
9,725.1
7,898.1
933.2
5,740.4
3,297.0
587.7




2003

613.2
182.4
1,284.8
1,278.4
115.0
1,097.0
591.2
120.1

4,987.7
1,210.1
8,107.3
6,287.7
794.7
4,471.5
2,588.1
475.3




2002

722.6
246.4
1,565.4
1,248.6
122.1
1,070.3
692.2
118.1

4,374.5
1,027.7
6,822.5
5,009.3
689.7
3,374.5
1,996.9
355.2



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Assistance Agreements

As shown in Exhibit 3, states awarded
more loans in 2006 compared to 2005.
Since 1997, the DWSRF programs have
provided nearly 5,000 subsidized loans
to water systems. Each of these loans
helps water systems by decreasing
the cost of critical investments in their
infrastructure.  These savings enable
water systems to maintain affordable
rates and free  up financial resources for
other uses, such as improved operations
or increased maintenance.
"Communities have  a lot of
work to do.   We're making
loans because there's a lot
to be done,"

David Leland, Oregon's DWSRF
Program Manager
                DWSRF Assistance Agreements
EXHIBIT 4
                   Providing Assistance
       3,000
                                                           2005          2006

                                                                 Project Completions

                                                             B1 Projects On-Going
                                                             • •Project Starts
EXHIBIT 5
  $1,800
                                                            Value of DWSRF Loans
                                           $1,600

                                           $1,400
            Cumulative Value of Loans
            Annual Value of Loans

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        Small Systems

        A key aspect of the design of every
        DWSRF program is an emphasis on
        providing assistance to water systems that
        serve 10,000 or fewer persons. These
        water systems often lack the technical,
        managerial, and financial capacity needed
        to overcome their challenges without
        assistance.  Small systems struggle
        because of their small rate bases and
        the economies of scale inherent in the
        drinking water industry. Yet small water
        systems provide drinking water to millions
        of Americans and these people need the
        same public health protection afforded
        people  served by larger systems.

        In 2006, 69 percent of all loans went to
        small systems and the value of these
        loans increased by 11 percent ($62 million)
        compared to 2005.  The loan assistance
        provided to systems serving 3,300 people
        or fewer is in-line with the percentage of
        national infrastructure need that these
        systems account for based on EPA's most
        recent Drinking Water Infrastructure Needs
        Survey.

        Disadvantaged Assistance

        Most states have taken advantage of
        DWSRF program provisions that allow the
        state to provide special financing terms on
        loans to disadvantaged communities (see
        Exhibit  6). As shown in Exhibit 8, states
        have provided a significant amount of
        assistance to disadvantaged communities
        and a significant amount  of assistance
        with principal forgiveness and/or extended
        repayment periods. Since 1997, states
        have provided over $2 billion in loans to
        disadvantaged communities (see Exhibit
        9); these systems served a combined total
        of nearly 8 million people.
EXHIBIT 6: STATES WITH A DISADVANTAGED
COMMUNITY PROGRAM
         Number of Agreements by Water System Size
   200
   160
 < 120
    so
    40
                                 • 2005
                                 • 2006


fill
                2°
           Water System Population (Number of Persons)
EXHIBIT 8
          Assistance to Disadvantaged Communities
    $7001
    $600
      Total Annual Assistance to Disadvantaged Communities
      > 20 Year Loan Repayment
      Principal Forgiveness
       i—   ra
       O)   O)
       O)   O)
          O)
          O)
          O)
O   *—   CM   00   *=J-   LO    CO
8888888
CM   CM   CM   CM   CM   CM    CM
EXHIBIT 9
    DWSRF Assistance to Disadvantaged Communities
  35°/01	r2,500
                                         2,000
                                        -1,500 "5
                                        . 1,000 =
                                                                                        -500
                                                                O   O  O   O  O   O   O
                                                         OimOOOOOOO
                                                                CM   CM  CM   CM  CM   CM
                                                   Percentage of All Agreements that Go to Disadvantaged Communities
                                                  • Cumulative Assistance (in millions) to Disadvantaged Communities

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                                      Water System Savings

                                      The weighted DWSRF interest rate dropped ii
                                      2006 to an all-time low of 2.07 percent, more
                                      than 2 percent below the prevailing weighted
                                      market rate (see Exhibit 10). In 2006, water
                                      systems saved an estimated $301 million over
                                      the lifetime of their loans by financing their
                                      public health infrastructure projects through
                                      the DWSRF (assuming that all loans had a 20
                                      year repayment period). The savings per loan
                                      averaged more than $500,000.

EXHIBIT 10
        Comparing DWSRF Interest Rates with the Market Rate
    6%
    5%
    1%
    0%
              Market Rate
-Weighted Average DWSRF Rate

                                                                                  •

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System Components

As shown in Exhibits 11 and 12, the majority of
projects financed by DWSRF programs in 2006
either included a treatment plant upgrade or
improvements to the distribution system,  which are
the key water system components for removing (or
inactivating) contaminants and delivering safe water
to the public. The "Other" category in the exhibits
encompasses planning and design,  land  acquisition,
and the purchase of systems.

EXHIBIT 11
 Portion of Funding of Executed Loan Agreements
            Storage
              11%
                                         Treatment
                                            44%
 Transmission &
  Distribution
     37%
EXHIBIT 12
 Portion of Number of Executed Loan Agreements
                                    Treatment
                                       21%
 Storage
   17%
       Source
        12%
Transmission &
  Distribution
     34%
                    DWSRF
                        iverview
                   is were established by the SDWA
        ents in 1996. The federal government annually
provides money that states can loan at below-market
interest rates to pay for qualifying improvements to
drinking water system infrastructure. Each state's grant
allotment is proportional to the total state need identified
in the most recent national assessment of drinking water
infrastructure needs.  States use the principal and interest
payments received from loan recipients to provide more
loans.

Before a state can receive a capitalization grant, a state
must:

•  Deposit match money equal to 20 percent of the grant
•  Show EPA that it has the ability to manage the
   program and that it will comply with the applicable
   statutes and regulations
•  Agree to deposit all program funds, except funds used
   for set-asides, into its DWSRF and agree to a timeline
   for providing assistance
•  Agree to use generally accepted accounting principles
   and to conduct an audit
•  Meet requirements related to state capacity
   development and operator certification programs

In addition  to the requirements above, states must
develop an annual Intended Use Plan (IUP), a
comprehensive list of eligible infrastructure projects, and
a list of the highest priority projects expected to receive
funding in that year. States must give priority to projects
that:

  1.  Address the most serious risks to public health
  2.  Are necessary to ensure system can meet SDWA's
     drinking water health-based standards
  3.  Assist systems most in need  on a per-household
     basis

States are  allowed to make loans for eligible projects
to publicly owned, privately owned, and nonprofit
community water systems (CWSs) and noncommunity
water systems. There are five basic categories of eligible
projects:

  1.  Treatment
  2.  Transmission and Distribution
  3.  Source
  4.  Storage
  5.  Consolidation

Items specifically excluded from DWSRF eligibility
include expenditures  for monitoring,  operations, and
maintenance, projects whose primary purpose is to
facilitate growth,  projects to construct or rehabilitate
dams and reservoirs, projects to obtain water rights, and
projects needed primarily for fire protection.

As more fully discussed on page 24, states can set-aside
up to 31 percent of their capitalization grant for specific
activities advancing the public health protection objectives
of the SDWA.

EPA and the states work together to  ensure complete
program accountability and the efficient and effective
use of public funds (for a list of specific state agencies
responsible for implementing the DWSRF, see page 40).

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2006
         focus
The 2006 Annual Report focuses on four areas critical
to  understanding the impact of the DWSRF programs.
PACE & EFFICIENCY

Since DWSRF public health benefits are only
created when states provide assistance, the first
step in analyzing the impact of the DWSRF is to
examine the pace of spending. Only by making
loans, implementing programs, and providing direct
technical assistance can states accomplish the
aims of the DWSRF.  By lending money, states
begin a cycle that multiplies its resources as the
money revolves from borrower to lender and back
again, growing the program over time.  Pace is one
key aspect of efficiency; other important aspects
are operational efficiency, return on investments,
and  public health benefits created. EPA and the
states are committed to continiously improving the
DWSRF program. This commitment is paying off
in enhanced national program performance in all
aspects of efficiency.


PROJECT PRIORITY LISTS

The  tangible result of the coordination of the
DWSRF and Public Water System Supervision
(PWSS) programs is each state's Project Priority
List (PPL), which serves as the DWSRF funding
agenda. In 2006, states across the country
continued to refine their PPL processes and how
the lists are presented.  These efforts improved
program planning, enhanced pace, and increased
public transparency.
COORDINATION

In order to ensure that assistance is
delivered to water systems that need
it, state DWSRF programs continue to
coordinate closely with their Public Water
System Supervision (PWSS) program
counterparts at the state level. In addition,
states work to ensure coordination with
other funding programs and with water
systems themselves. State DWSRF
coordination in 2006 ensured that funds
were used efficiently to maximize the
impact on public health.


AUDITS

Integrity and full public accountability
are at the core of each state DWSRF
program. Audits provide the critical link in
the program management and oversight
process to ensure program integrity.
EPA continues to work with the states to
continuously refine and improve the scope
of, intensity of, and follow up to program
audits.

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                  PACE   &  EFFICIENCY
  The public continuously receives safe drinking
  water because water utilities continuously invest
  in repairing and replacing their infrastructure. The
  DWSRF plays an important role in helping many
  water utilities finance these capital investments.
  The revolving fund model is a powerful tool for
  supporting the on-going infrastructure investment
  needed to ensure continued provision of safe
  drinking water.  Since the inception of the DWSRF
  program, Congress has appropriated almost $8
  billion, EPA has awarded capitalization grants of
  $7.3 billion, and states have invested matching
  funds of $1.8 billion. With the addition of leveraging
  and loan repayments, a total of almost $13 billion
  has been made available for loans through 2006.

  The fundamental design of each program allows
  public monies to multiply as loans are made,
  repaid, and made again. The systems that receive
  subsidized loans benefit from the savings, and their
  payments help ensure that there are resources to
  assist other systems in the future.  As the financial
  returns of the DWSRF grow, so do the public health
  returns.
EXHIBIT 13
         Annual Funds Available and Assistance
                     Provided
                        Annual Funds Available for Projects
                        Annual Assistance Provided
                     *—    CM   CO    *=J-    LO   CO
                     888888
                     CM    CM   CM    CM    CM   CM
The success of the DWSRF can be captured by
looking at four separate aspects of the programs'
efficiency:

 1.  Fund utilization efficiency - or pace - is a
    measure of the loans a state program has
    made compared to the loans the program
    could have made given the resources
    available.
 2.  Operational efficiency is a measure of
    the resources used for program overhead
    compared to the assistance provided.
 3.  Multiplier efficiency is the return on state
    and federal investment and measures the
    total financial resources made available by the
    federal and state investments.
 4.  Public health efficiency captures the public
    health protection (the ultimate outcome for the
    DWSRF measured in terms of water system
    compliance) achieved by assistance.

EXHIBIT 14: ASSISTANCE PROVIDED AS A PERCENT OF
FUNDS AVAILABLE
Fund Utilization Efficiency

Pace is the keystone to the growth and continuation
of each DWSRF and is the engine that drives
public health protection. Cycling investments,
loans, and repayments through the fund ensures
its growth and ability to finance safe drinking water
projects in perpetuity.  In 2006, states continued
to aggressively increase their fund utilization, as
measured by the assistance as a percentage of
funds available, and continued to keep up with the
growth in  available funds (see Exhibit 13). Over

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the life of the program, states have provided $11
billion in loans (a utilization rate of 86 percent) to
finance nearly 5,000 projects. As shown in the map
in Exhibit 14, most states have a cumulative fund
utilization rate that exceeds 80 percent in 2006.

In addition to increasing their pace of assistance,
states also increased the pace of disbursement
to nearly 70 percent (see Exhibit 15). Most states
increased their rate of disbursement in 2006 (see
Exhibit 15 for cumulative disbursement rates).
EXHIBIT
       Disbursement as a Percentage of Total Assistance
                       Provided
                                                                                                I
                                                         What are Disbursements?
                                                         A key metric for the DWSRF program is
                                                         disbursements, or the funds disbursed to
                                                         loan recipients to reimburse invoices for
                                                         construction or other capital costs.
EXHIBIT 16: DWSRF
OF TOTAT ASSISTANf
;D AS A PERCENT

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 leveraging
 In order to immediately increase resources available
 for assistance to better meet water system demand,
 20 states have leveraged their programs by issuing
 bonds.  Leveraged states have more resources to
 provide immediate assistance, which generates
 more immediate public health  protection, although
 at the longer term cost of having to repay the bonds
 they issued. There can be a significant difference
 between leveraged and non-leveraged states in
 these efficiency measures.

 Exhibit 17 shows that leveraged states have a
 higher cumulative fund utilization than states that
 have not leveraged, showing the effectiveness of
 leveraging where there is appropriate demand.
 Leveraged states were also more successful in
 disbursing funds, as shown in  Exhibit 18.
       87%
            Cumulative Assistance Provided as
              a Percent of Funds Available
            Leveraged States
    Non-Leveraged
      States
              Disbursements as a Percent
                of Assistance Provided
                                                               70%
                                                               65%
                                                               60%
                                                                    Leveraged States
 The pace of loan principal and interest repayments
 has also dramatically increased as fund utilization
 has increased. The increase in the pace of
 recycling principal and interest monies back into the
 program (as shown in Exhibit 19) yields even more
resources that states can use for public health
protection. The portion of total dollars available
for assistance that comes from principal and
interest payments has steadily increased and
continued to do so in 2006 (see Exhibit 20).
EXHIBIT 19
EXHIBIT 20
               DWSRF Operating Revenue
  400

  350

  300

o 250

2 200

  150

  100

   50
           - Fees

           - Interest Earnings on Investments

            Principal Repayments

            Interest Payments
   25%
 '
 co
 -a
 c
                                                         c
                                                         c
                                                         c
                                                         o>
                                                         o
                                                         CD
                                                         CL
   20%
   15%
                                                           10%
                                                            5%
                                                            0%
          Annual Loan Principal Repayments and Interest as
           Percent Contributors to Available DWSRF Funds
                  01
                  Oi
                  Oi
o
o
o
CNJ
o
o
CNJ
o
o
CNJ
•3-   LO  CD
O   O  O
O   O  O
CNJ   CNJ  CNJ
                                                                 - Interest Payments as a % of Funds Available
                                                                 -Loan Principal Repayments as a % of Funds Available

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Operational Efficiency
Multiplier Efficiency
States must devote significant staff and resources to run
a successful DWSRF program that protects public health
and meets its fiduciary responsibilities to the public.  In
order to increase fund utilization, states need staff with
the time and ability to identify systems in need, assist
systems with completing loan applications, and guide
systems through the entire process. The resources that
states spend to implement and grow their programs
yield impressive returns on investment and public health
protection.  States are increasing their operational
efficiency by lowering their overhead as a percentage
of assistance provided.  Exhibit 21  shows the dramatic
difference in the growth rate of assistance compared
to administrative costs.  Exhibit 22  shows that the slow
growth in DWSRF program administrative expenses has
been funded through fees and set-asides.
          Annual Assistance Provided and Associated
                   Administrative Costs
            Total Annual Assistance
            DWSRF Administrative Costs
                                          8   8
          Breakdown of Revenue Sources to Pay DWSRF
                 Administration Expenses
One of the reasons for the remarkable
success of each DWSRF program is the
strong partnership between the federal
and state government to protect public
health; every DWSRF program is a true
joint venture. At the outset, the financial
investment by the federal government is
increased by each state's 20 percent match.
The  multiplier effect is even greater for states
because every $1 invested by the state is
matched by  $4 from EPA. This mutually
beneficial financial partnership allows states
to build drinking water programs that yield
greater public health protection than states or
the federal government could realize on their
own.

The  multiplier efficiency improves as fund
utilization and subsequent principal and
interest payments increase.  This cycle
creates a perpetually increasing investment
as the original federal and state investments
are recycled to provide more loans and safe
drinking water time and again.

The  cumulative return on federal
investment continued to increase in 2006,
as demonstrated in Exhibit 23.  For every
federal dollar invested in the  DWSRF, $1.73
in assistance has been provided to water
systems to protect public health.  The return
on state investment has been even more
impressive.  For every state dollar invested,
state DWSRF programs have provided
$4.84 in assistance to ensure safe drinking
water (see Exhibit 24). The greatest return
on investment for both federal and state
governments was in leveraged states, where
the average  return on investment was more
than double  the return from non-leveraged
states.
                                                          To Leverage or Not to Leverage?
                                                          States' decisions to leverage are based
                                                          on a variety of factors, including demand
                                                          for funds and the urgency of projects.
      Other State Sources
      Fee Accounts
      DWSRF Administration Set-Aside
                                           12

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Public Health Efficiency
                                     Building on Success
The DWSRF Programs directly benefit public
health by enabling water systems to invest in
critical drinking water infrastructure. Because
the benefits of drinking water infrastructure
cannot be directly measured, EPA uses the
rates of water systems' compliance with drinking
water standards as a proxy measure for public
health protection.  Systems that comply with all
applicable drinking water rules are delivering
water to consumers that is safe to drink. The
vast majority of DWSRF loans fund projects that
either return a system to compliance, keep a
system from falling out of compliance, or enable
the system to comply with a new standard. These
projects directly produce public health benefits
for the life of the infrastructure, which can be
longer than  50 years for some distribution system
components.

The total population served by systems that
received a loan ensuring compliance more than
doubled in 2006 - from 20 million people in 2005
to 42 million Americans in 2006. Last year, more
than 90 percent of all assistance provided went
to projects that ensured compliance, a significant
increase over 2005 fueled by growth in the funding
of projects that return systems to compliance (see
Exhibit 25).
                                     The flexibility of the DWSRF has allowed states to
                                     manage their programs in ways that have increased
                                     pace. For instance, some states are instituting
                                     efforts to accelerate loan repayment, increasing
                                     the speed  at which money cycles back through
                                     the program. Common practices to quicken loan
                                     repayment include employing state construction
                                     managers  to keep projects on schedule and
                                     implementing contractual changes to encourage
                                     the timely receipt, use, and repayment of funds.
                                     The case studies of Georgia, New York, and
                                     Arizona that follow on page 14 demonstrate these
                                     strategies.

                                     Other state DWSRF programs have created more
                                     attractive terms and loan packages in order to
                                     increase fund utilization and return on investment.
                                     Alaska, for example, previously tied the DWSRF
                                     rate to the  municipal bond index. After adjusting the
                                     floating rate to a flat 2.5 percent, the state has seen
                                     increased  borrower enthusiasm.
   'We  know EPA only awards this money if it is used,  and used
        well, "Jason Bodwell,  Georgia SRFProgram Manager
                                             EXHIBIT 24
  DWSRF's Cumulative Return on the Federal Investment
                                                  DWSRF's Cumulative Return on the State Investment
CD
CO
c
o
DWSRF Disbursements
Federal Outlays

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 GEORGIA

 From 2004 to 2006, nearly 100 percent of DWSRF funds available in Georgia have been utilized, a
 30 percent increase from the three preceding years.  Georgia's pace increased because the State:

    1.  Gives communities only 6 months after project approval to move forward and only 1 year to
       draw the first dollar;
    2.  Maintains an Inactive  Project List of communities that have been inactive for at least 3
       months;
    3.  Works closely with communities that have slow moving projects; and,
    4.  Funds large projects through a phased approach to loan disbursement and repayment.  For
       example, if a community requires $30 million, the State issues 3 promissory notes of $10
       million, each requiring repayment at a different time.

           NEW YORK

           New York has increased pace by providing borrowers with short-term (3 year) financing, for
           which the application process is less onerous and quicker than that for long-term financing.
           Short-term financing is most often used for planning and design and land acquisition
           (water quality protection), and frequently rolls over into long-term financing. The State
           has identified two key benefits of short-term financing: it moves money to borrowers more
           quickly and results in more accurately-planned and budgeted long-term projects.
  JUZONj
 Arizona requires its DWSRF program to make a decision on a finance application within 90 days
 of receiving it.  Once a project has been approved, it is the ongoing objective of the Finance
 Authority to circulate and obtain comments on draft loan documents within 30 days and execute
 a financial assistance agreement within 75 days.  For the past couple of years, the median time
 from application submission to loan execution has been 95
 business days. In addition, a law passed in 2006 further
 increased pace by making it easier for small communities
 to borrow money.  Municipalities and domestic water and
 wastewater districts serving fewer than 50,000 people may
 now enter into a loan with the Finance Authority without
 holding a bond election.
EXHIBIT 25
          Assistance for Compliance as a
            Percent of Total Assistance
   c
   S
   to
   '(/)
   I/)
     100%
80%
  S   60%-
  3
  o
   c
   CD
   o
   CD
  Q_
      40%-
20%
               2005           2006
   Assisting Compliant Systems to Meet Future Requirements
   Assisting Compliant Systems to Maintain Compliance
   Assisting Non-Compliant Systems to Achieve Compliance

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                          COORDINATION
                        In each state, the DWSRF
                        program is one important
                        part, but only a part, of a
                        powerful suite of programs
                        dedicated to achieving
                        the "water safe to drink"
                        objective that drives the
                        national drinking water
                        program. States are
                        working to coordinate the
   financial resources and financing expertise of the
   DWSRF with the expertise, authority, and oversight
   of the state's drinking water primacy agency. This
   horizontal integration of knowledge and efforts
   between the Public Water Supply Supervision
   (PWSS) program and DWSRF is key to capturing
   the greatest public health benefits from the nation's
   investment in the DWSRF programs.  In addition,
   states are also tackling the important tasks of
   vertically coordinating with water systems that need
   assistance as well as cooperating with other funding
   programs (see Exhibit 26).
Coordination  between DWSRF and
PWSS programs

PWSS programs have primary enforcement
responsibility (also known as "primacy") for ensuring
that public water systems (PWSs) maintain SDWA
compliance.  PWSS programs develop state
drinking water regulations, maintain inventories
of PWSs, conduct sanitary surveys, provide
technical assistance, and ensure that all systems
comply with state requirements. PWSS program
staff are best positioned to identify systems that
need funding assistance for compliance and help
these systems access the DWSRF. Primacy
agencies and DWSRF programs have continued to
strengthen their coordination to ensure that precious
loan and set-aside resources are directed to the
water systems that need them most and that set-
asides are used most effectively. This coordination
continued to pay off in 2006 as the loans that
ensured compliance with public health standards
increased by nearly $350 million.
   EXHIBIT 26: COORDINATING RELATIONSHIPS
                                              Other Federal Programs
                                                    Other
                                                Funding Programs
                                                TA Providers and
                                                Other Third Parties
                                                                CD
                                                                CD
                                                                E
                                                                CD
                                                                •a
                                                                CD
                                                                CD
                                                                CD
                                                                CD
                                                                3
                                                                CO
                                                                CD
                  cc
                  o
                  o
15  Relationships highlighted in this section are in orange.

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The following examples illustrate the variety of ways
in which states have coordinated efforts to identify
struggling systems and supply them with necessary
resources.

In California, the Drinking Water Program of the
Department of Health Services (DHS) is responsible
both for DWSRF financing and for regulatory and
compliance oversight.  Having both functions
performed within the same division facilitates
coordination between the efforts.

Other states find it advantageous to divide the
primacy and financing programs among separate
agencies with specialized expertise that maintain
close communication.  For example,  in Oregon, the
Oregon Economic and  Community Development
Department (OECD) is a central clearinghouse for
many state funding programs and  benefits from the
additional resources and experience that come with
these responsibilities.  Frequent communication
between the OECD and the Department of Health
Services (DHS), Oregon's primacy agency, ensures
that DWSRF loans are made to systems most in
need in order to maximize public health protection.
When OECD signs  off on a project from DHS's
Project Priority List, it invites  DHS  to  communicate
any shortcomings of the project plan, which may
then be incorporated as conditions of the loan.

Coordination between DWSRF
programs and PWSs

To efficiently target water systems most in  need
of DWSRF funding there must be effective
communication between the agency  providing
assistance and the systems that need help. State
DWSRF programs have used a variety of strategies
to foster communication with PWSs in order to
help systems assess their needs, understand
the benefits of financing their project through the
DWSRF, and tailor assistance to each system's
situation. It is especially critical for DWSRF
programs to focus attention on disadvantaged
communities and small systems, as these
communities typically lack the capacity to address
the challenges they face on their own.

Education and outreach activities are important
tools for DWSRF communication.  Several states
use funding fairs to raise awareness of
available assistance and their application
and lending processes requirements.
Systems frequently comment that they
appreciate having multiple agencies in
one place for face-to-face communication.
Some states use Web sites to provide easily
accessible information, such as project
status updates.

The City of Pawtucket, Rhode Island, worked
closely with the State to find creative, flexible
DWSRF funding solutions that would soften
the impact of much needed infrastructure
improvements on costs to ratepayers.
(See the back cover of this report for more
details.)

In Arizona, the Rural Water Infrastructure
Committee (RWIC) is a flexible organization
that serves as a "one-stop shopping" entity
for communities and small water systems
in need of assistance.  At bi-monthly
project meetings, staff of numerous funding
and technical assistance sources are on
hand, allowing system  and community
representatives to explore the myriad of
technical assistance and funding options for
infrastructure projects available to them in
one place. As RWIC provides both financial
and technical assistance, meetings are
commonly followed by  on-site technical
assistance visits and reviews of existing
infrastructure design plans.

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Coordinating  funding with other funding agencies
Many states have found that
their DWSRF funds go furthest
when they are coordinated
with funds of other state
and federal programs with
shared or complementary
objectives. A common goal
of such coordinated efforts is
to streamline the application
process to make it easier on
water systems that need help
but are unsure about how best
to get it. As shown in Exhibit 27,
DWSRF assistance coordinated
with funding from other sources
has been increasing, both
absolutely and as a percentage
of the total coordinated
assistance that systems receive.
                               EXHIBIT 27
       DWSRF Funding Coordinated with Other State or
                 Federal Funding Sources
2,000
1,800
1,600

1,400
i Total Cumulative Coordinated Funding
 DWSRF Portion
EXHIBIT 28
                Assistance for SDWA Compliance
                 2005

          Compliance with Future Requirement
          Maintain Compliance
          Return to Compliance
    2006
            In Montana, the Waste,
            Wastewater and Solid Waste
            Action Coordinating Team
            (W2ASACT) agencies use
            a uniform application with
            agency-specific supplements.
            In California, the California
            Financing Coordinating
            Committee (CFCC) coordinates
            the assistance of several
            state agencies, including the
            DWSRF. And in Kentucky, the
            DWSRF program coordinates
            with Rural Development and
            Community Development
            Block Grant (CDBG) programs
            and works closely with the
            Appalachian  Resource
            Commission  (ARC) to target
            disadvantage communities for
            assistance.

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               LONTANA
                          it of Environmental Quality (DEQ) administers the DWSRF and
             PWSS programs, and the Department of Natural Resources and Conservation
             (DNRC) issues the State's general obligation bonds and makes loans to project
             borrowers.  The DWSRF and PWSS programs communicate closely about rule
             implementation and project development and funding.  For example, PWSS
             program staff alert DWSRF program staff to projects with critical needs, and
             frequently refer permit applicants directly to the DWSRF when they identify
             deficiencies in their systems.

             The location of Montana's DWSRF and PWSS programs within the same
             building also facilitates coordination. Mark Smith (DEQ): "I can always run
             downstairs  and look at a file for a particular system. Hard copies on hand and
             face-to-face contact makes for timeliness."
CALIFORNIA

The Drinking Water Program within the Department of Health Services (DHS) is responsible both
for DWSRF financing and for SDWA regulatory and compliance oversight.  California has found
that increasing PWSS attention to enforcement and compliance has increased systems' interest
in DWSRF assistance.  Systems that would
otherwise prefer to wait for grant money are
more inclined to take immediate advantage of
DWSRF loans following documentation of a
problem.

The California Financing Coordinating
Committee (CFCC) facilitates coordination
of the funds of several state agencies,
including the DWSRF. Agencies review each
other's priority lists and compare fundable
components. The CFCC decreases the
application burden wherever possible. A
common inquiry form is accepted by all
agencies, and an environmental review
conducted by the DHS is accepted by other
agencies.

Coordination through CFCC improves the
pace and efficiency of California's DWSRF.
Because the DWSRF has extremely
competitive interest rates, it rarely loses
eligible projects to other agencies.  "We can
help extend others' funds, and they help us
by funding lower ranked projects," says Steve
Woods of DHS.

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  PROJECT  PRIORITY  LISTS
Project Priority Lists (PPLs) are the operational
cornerstone of a state's DWSRF program.
The list includes all the projects that the
state DWSRF program could potentially fund
and orders them according to established
criteria reflecting program priorities.  One key
project characteristic — a project applicant's
readiness to proceed — is not reflected in the
projects' ranking on the comprehensive list.
"Ready to proceed" projects are those that
can begin work when a loan is signed or even
sooner, depending on the project and finance
vehicle.

Under the 1996 Amendments to the SDWA,
states are required to use their DWSRF funds
to assist the highest priority projects. To
determine this order, each state has developed
a ranking system,  which must give priority to
projects that:

    Address the most serious risk to human
    health;
    Are necessary to ensure compliance with
    the requirements of the SDWA; and
    Assist systems most in need (on a per
    household basis).
States are allowed to give consideration to other
factors such as whether the project includes
other priority elements such as consolidation,
water efficiency, and security.  These additional
considerations can create a more robust PPL
and can further the goals of the Four Pillars of
Sustainability.

There are several reasons why a state's PPL
might not accurately represent the projects that
receive loans in a given year.  For instance,
states may lack the funds to award loans to all
the projects, or litigation issues may arise that
delay top projects. Sometimes higher priority
projects do not receive funding because they
are not "ready to proceed" due to incomplete
paperwork, engineering plans, or environmental
impact reviews.

Several states are implementing innovative
programs to improve the transparency and
effectiveness of their PPLs. Arizona, Georgia,
Ohio, and Indiana, among others, are creating
supplemental lists or delineating within the PPL
the projects that are within the "fundable range"
for the coming year.  States are also actively
helping systems with the loan  application
process, further ensuring that all projects on the
PPL are indeed ready to proceed. Updating
the PPL multiple times a year has proven to
be another effective tool to improving the state
PPLs.

Maintaining a PPL sublist of only projects ready
to proceed is essential to ensuring that DWSRF
programs maintain pace while still funding the
highest priority projects.  EPA expects all states
to continue to improve their priority lists in
               2007 so that the projects that
               receive funding are those at
               the top of the priority list.

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project  priority  list  case  studies
  OHIO

  In 2005, out of frustration that high-priority projects were not being funded, Ohio began grouping projects on
  its PPL into three categories.  Those projects that are "ready to proceed" are labeled as either "fundable" or
  "contingency" projects, depending on whether they are high enough priority to receive funds available in the given
  program year.  The fundable projects for a given year comprise Ohio's Intended Project List, which supplements
  its PPL.

  Projects that will not be ready to receive funding during the year are assigned "bypass"
  status.  Ohio has made its bypass procedure aggressive in order to ensure that projects on
  the Intended Project List are truly ready to proceed.  For example, projects that do not have
  have detailed engineering plan approval within certain timeframes are bypassed.

  Ohio also requires systems that did not receive a loan in the previous year to resubmit the
  pre-application materials, including a new project schedule. If a system does not re-submit
  the pre-application, the project is removed from the PPL.  This helps  Ohio  ensure that the
  systems on  its PPL are ready to move forward.
  GEORGIA
  To prevent its PPL from being encumbered by projects that are not ready to proceed,
  Georgia moves projects on the PPL that have been inactive for more than three months to
  an "Inactive Project List."
                            IZONA
                                       its PPL process so that the PPL can be amended up to six times a
                        year. To ensure that the borrower is committed to receiving a loan, and to help better
                        allocate state resources, Arizona has a set of "readiness to proceed requirements" for
                        which projects receive prioritization points. Projects receive Readiness to Proceed
                        points for having:

                           1.  Debt Authorization (40 points)
                           2.  Solicited Bidding (30 points)
                           3.  Plans and Specifics Approval (20 points)
                           4.  Project Design Completed (10 points)

                        Only projects that have at least 40 Readiness to  Proceed points are placed in the
                        Fundable Range of the PPL.  When a project is put in the Fundable Range, the State
                        sends the system a set of application materials.  Once the system has had the materials
                        for a week, State staff visit the system to assist them with completing the required
                        paperwork.  During this visit, State staff may take photos, ask questions, and make
                        suggestions on what documentation should be included to complete the application.
  INDIANA

  To prevent projects from being prematurely added to the PPL and to gauge a system's commitment to accepting a
  DWSRF loan, Indiana only adds projects for which a preliminary engineering report has been submitted. Indiana
  also demarcates the top portion of its PPL as being within the coming year's fundable range. For the first 4
  months of the fiscal year, only projects within the fundable range can receive loans. After 4 months, the funds are
  made available to all projects on the PPL. Indiana notes that creating these windows has benefited small and
  disadvantaged systems and encouraged more systems to apply for loans.
                                                                                                        20

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                           AUDITS
As DWSRF programs continue their
rapid growth, the importance of reliable
accounting and regular independent audits
increases. The public has invested billions
of dollars in the DWSRF programs, and
the programs must preserve this protect
public trust. In addition to providing
accountability, audits can help states
improve their program management.

Benefits of Audits

Audits benefit the managers of DWSRF
programs, the water systems relying
on the DWSRF programs for low-cost
infrastructure financing, and the public that
has funded the programs to ensure that
they have access to safe drinking water.
DWSRF program managers need to be
able to have total trust in the accounting of
their programs and know that the internal
controls are functioning properly. From an
external perspective, independent audits
give both the public and elected leaders
assurance that the finances of the program
are being managed properly and will exist
in perpetuity.

Separate financial statements are
necessary to determine how state and
federal capital invested in DWSRF
programs are managed, and to be
confident of this accounting, these
statements must be audited. Wthout
confidence from regular and thorough
auditing, the historical record of program
performance is suspect. As a result,
program managers cannot judge whether
the fiduciary aspects  of the program are
being managed adequately  and cannot
plan for the future.

Worse, without good  accounting, decisions
can be made based on  faulty information,
as was the case in one  state, which relied
only on its Single Audit.  Unbeknownst
to program managers (and undetected by the
Single Audit), a non-SRF loan had been booked to
the DWSRF.  The error was only uncovered after
EPA's Office of Inspector General (OIG) audited the
DWSRF program.

As the DWSRF programs have grown, the
importance of separate accounting and auditing
of DWSRF programs has only increased.  Doug
Garrett, Deputy Director of the Financial Assistance
Center for the Missouri Department of Natural
Resources puts it this way, "Missouri's Drinking
Water and Clean Water SRFs combined have
oversight of over $1.6 billion in loans — that's more
than some banks in Missouri  handle.  We've got to
make sure those funds are being used as intended."

States  Take the Lead

Many states have long recognized that Single
Audits, unless significantly modified, lack the
detail on program finances, internal controls, and
compliance needed to run a responsible program.
Before OIG began regular auditing of states that did
not already conduct their own independent audits,
22 states were already conducting independent
audits of their DWSRFs.  This group of pioneers
included all leveraged states  (an audit was
necessary to assure parties in the bond market that
their interests were protected) and several non-
leveraged states, which were voluntarily auditing
as part of their commitment to responsibly manage
the public investment and in order to capture the
benefits of an audit.

When OIG initiated audit oversight, 21 more
states decided to conduct their own independent
audits rather than rely on EPA.  In 2006, 42 of 50
states and Puerto Rico were conducting regular,
independent audits of their DWSRF programs, and
one additional state has agreed to perform a first-
ever independent audit in 2007.  The seven prgrams
that did not conduct their own audits often cited a
lack of resources or pointed to the Single Audit Act
provision.

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The Future of DWSRF Auditing

With the change in policy for 2007 that removes the OIG
as an audit option for the few states not yet conducting
their own independent audits,  EPA expects these states
to join the other 44 programs in meeting the DWSRF audit
requirements.  The DWSRF programs have sustained
impressive growth while meeting high accounting standards
and maintaining the program's strong standing in the eye
of the public and financial community. Demonstrating
accountability and stewardship of the Fund is essential as
the importance of reliable accounting continues to increase
as the DWSRF programs grow.
                                                                                          ^H

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Audit Benefit Case Study

In 2000, a state discovered that the trial balance (the listing of all accounts to ensure that debts are equal
to the sum of all liabilities plus equity and capital) for its DWSRF account was out of balance. A thorough
audit by the OIG was able to determine what had gone wrong and how to fix the problem. Findings
revealed problems with compliance and a lack of internal controls.  The state's Single Audit had missed
the problem because it highlighted only federal money and state match funds in reserve and ignored
bond money and loan repayments, which account for the majority of the activity of the DWSRF.

With the help of an auditor, the state was able to use the findings to make real improvements to its
DWSRF program. A new accounting system was implemented, and a 2003 audit revealed significant
improvement in funds management. Having concluded that its Single Audit does not review the DWSRF
program in sufficient detail, the state is working hard, with support from its EPA Region, to secure funding
for regular independent audits of its DWSRF program.
Single Audits:
Relying on a Single Audit for DWSRF oversight
decreases the burden to a state, but when
it comes to providing confidence in DWSRF
financial information, Single Audits are
inadequate without significant modification.
 The Single Audit Act stipulates that States
 can conduct (at a minimum) a single state-
 wide audit for review by the OIG. The goal of
 such a broad audit is to ensure that federal
 money is used properly, and that a  uniform set
 of accounting standards is adhered to at an
 entity-wide level. However, single audits are
 not intended to provide detailed audit coverage
 of all federal awards made to the auditee or to
 provide detailed information about individual
 awards.

 A Single Audit depends on the professional
judgment of an auditor who must decide which
 programs should be audited. As the auditor
 cannot audit and conduct risk evaluations for
 every program, this decision is not made in
 a vacuum  but under pressure and within the
 context of a complicated set of rules.  The end
 result is that the DWSRF financial statements
 and internal controls may entirely escape
 review under a Single Audit.

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 set-asides
                        IN  2006
                       The four DWSRF
                       set-asides together
                       constitute a rich,
                       flexible package of
                       tools that states use
                       to run their critical
             *f.*i^^     i • i •
                       drinking water
                       programs and provide
                       assistance to water
systems. Inherent in the design of the DWSRF set-
asides is the ability of states to innovate within their
programs so that the solutions and assistance they
offer are tailored to the needs of their systems.  In
most states, the resources from the set-asides are
the lifeblood of state programs that directly ensure
public health is protected.

Big Changes  in 2006

Since the early years of the DWSRF programs,
states have been aggressively spending their
set-aside resources to aid water systems and
protect public health. Over the years, however,
states set aside tens of millions of dollars more
than they spent, swelling the balances of state
set-aside accounts. In 2006, states reversed this
trend and reduced  the amount of dollars set aside
(leaving more in the loan fund for financing critical
infrastructure) while still increasing the amount of
set-aside spending; the  net result was that states
began to spend from their accumulated set-aside
balances as EPA had requested. The simultaneous
increase in set-aside spending and increase in
available funds for loans increases the impact
of both aspects of the program as states show
determination to use resources now rather than
stash them away for the future.
Benefits Increasing

Like the compounding of benefits generated by
the infrastructure built with DWSRF loans, the
technical, managerial, and financial expertise
built from set-aside-funded technical assistance
accrues each year — in other words, the
knowledge and tools provided to system staff
in 2005 continue to benefit their consumers in
2006.  The impact, therefore, comes from the
continuance of the public health improvements
created by set-aside utilization prior to 2006; these
benefits are increased as states ramp up spending
from their set-asides to protect public health (set-
aside funds only produce benefits when spent), as
shown in Exhibit 29.

EXHIBIT 29
       Annual Set-Asides Awarded and Expended
  400 ~
  350
    Cumulative Set-Aside Reserve
    Total Annual Set-Aside Activity Dollars Expended/Committed
    Annual Net Total Amount Awarded for Set-Asides
EXHIBIT 30: CUMULATIVE SET-ASIDE SPENDING
RATES

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        SET-ASIDE  BASICS
                                                                           A oi
25
  Each state reserves a portion of its
  capitalization grant to support the
  core drinking water programs of their
  state drinking water programs.  These
  programs, which can include the Public
  Water System Supervision (PWSS)
  program, Capacity Development,
  Operator Certification, Source Water
  Protection, and the DWSRF itself,
  improve the technical, managerial,
  and financial capacity of drinking
  water systems. These set-aside funds
  particularly benefit people served by
  small or struggling systems. Set-aside
  spending enables thousands of drinking
  water systems to sustainably provide
  adequate amounts of safe water to
  millions of people.

  The DWSRF is unique because of
  the four set-asides which target key
  underlying conditions that affect drinking
  water systems' abilities to protect
  public health.  States elect to reserve
  a portion of their federal capitalization
  grants (from zero percent to the
  maximum allowable percentage in each
  category) and apply these funds as
  direct assistance to improve systems'
  institutional capabilities.  Each state
  uses a blend of set-aside spending that
  is designed to meet the needs of its
  drinking water programs and drinking
  water systems.

The map in Exhibit 30 shows the cumulative
set-aside spending rates by states.  As
shown  in Exhibits 29 and 31, states
continued to increase the cumulative
rate of  DWSRF set-aside spending from
2005 to 2006.  They increased the annual
spending rate of set-asides from 81 percent
of funds available in 2005 to 102 percent
in 2006 by spending down their set-aside
reserves. Overall, states have reserved
approximately $1.2 billion in set-asides and
have already spent 70 percent of those
funds, $828 million, helping water systems.
After several years of decline, the number
of systems directly assisted by state set-
aside spending increased by 8 percent from
2005 to 2006.  This means that thousands
more systems now provide more effective
protection of health for their consumers.
                                               Administration and Technical Assistance (4%):
                                                   Administer the DWSRF program and provide
                                                   technical assistance to public water systems

                                               Small System Technical Assistance (2%):
                                                   Provide technical assistance to small systems
                                                   serving no more than 10,000 people

                                               State Program Management
                                                 (10%, requires dollar-for-dollar match):
                                                   Administer the state PWSS program
                                                   Administer and provide technical assistance through
                                                   source water protection programs
                                                   Develop and implement a capacity development
                                                   strategy and/or operator certification program

                                               Local Assistance and Other State Programs
                                                 (15%, no more than  10% per any one activity):
                                                   Implement broad range of programs including source
                                                   water protection, wellhead protection,  and capacity
                                                   development.

                                               * These set-aside percentages are the maximums of the federal
                                               grant that can be taken, but each state has the discretion as to
                                               how much to set aside (up to the allowed amount).

                                              EXHIBIT 31
                                                     Cumulative Set-Asides Awarded and Expended
                                                      • Cumulative Net Total Amount Awarded for Set-Asides
                                                      • Cumulative Set-Aside Activity Dollars Expended/Committed
                                                       Cumulative Spending Rate
State DWSRF programs increased the impact of their
set-aside spending in 2006 — and can use set-aside
balances to do even  more in 2007. The national set-aside
balance is still $362 million. As states continue to focus on
immediately improving the capacity of struggling systems
and work with systems to comply with the new drinking
water rules — Ground Water Rule, Stage 2 Disinfectants
and Disinfection Byproducts Rule (Stage 2 DBPR), and
Long Term 2 Enhanced Surface Water Treatment Rule
— EPA expects states to continue increasing the pace of
set-aside spending in 2007.

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 w
 HH
 H
 HH
 fc
 H
 w
 Q
H
w
on
w
on
State Program Implementation 4%  2% 10% 15%
Capacity assessments             I^H^BI  *     *
Circuit riders                          ^^Hl  *     *
Community outreach                 •              •
Compliance determination and
evaluation
Construction inspections              •         •
Enforcement                                 •
Lab certification                              •
Monitoring waiver program                          •
Operating permits and monitoring
compliance
Operator certification                               •
Oversight of contamination clean-up                   •
Regulation of water withdrawal                       •
Rule implementation                          •
Sanitary surveys                       ^^Hl  *     *
Significant non-compliance assistance            •
Software and data system upgrades     •         •     •
Staff                           I^B^BI  •
Standard operating procedure
manuals
Training                             ^^Hl  *     *
Unregulated Contaminant Monitoring             •
Water quality alerts                            •
Waterborne disease surveillance                 •
4% Administration & Technical Assistance Set-Aside

          States: 47 spent and 40 set aside*
          Set aside: $26 million ($6 million decrease)
          Spent: $30 million ($1.5 million increase)
          Note: 98% spent on running state DWSRF programs

          Set aside: $281 million
          Spent: $216 million
          Spending Rate: 75%
          Remaining Balance: $64 million

    *i.e., 47 states spent funds under this set-aside, either from this year's
    set-aside or from reserves from previous years' set-asides. 40 states
    set aside a portion of their 2006 capitalization grants.
    EXHIBIT 32
                         Administrative Set-Aside
                 Amount Annually Awarded and Expended
                                                                                                                 90%
       Water System Assistance
    Area-wide optimization (AWOPs)
    Asset inventories
    Backflow and cross-connection
    prevention
    Board member training
    Comprehensive performance
    evaluations (CPEs)
    Consolidation and regionalization
    Consumer Confidence Reports
    Contaminant inventory
    DWSRF loan application
    Emergency infrastructure upgrades
    Financial planning and business
    plans
    Hydrologic studies
    Land and easement acquisition
    Leak detection programs
    Legal Assistance
    Local/regional land use planning
    Mentoring and peer assistance
    Monitoring plans and schedules
    Pilot studies for disinfection
    byproducts and arsenic
    Plugging abandoned wells
    Pollution prevention program
    Public outreach tools
    Rate setting and reviews
    Receivership program
    Regional water feasibility studies
    Sanitary survey deficiencies
    Security and emergency response
    Smart growth guidelines
    System partnerships and mutual  aid
    networks
    Tracer studies and  engineering
    services
    Treatment and distribution system
    evaluations
    Vulnerability assessments
    Water conservation and drought
    tracking
    Water quantity modeling
    Wellhead protection plans and
    source water protection
                                4%  2% 10% 15%
                                                                Cumulative Set-Aside Reserve
                                                                Total Annual Set-Aside Activity Dollars Expended/Committed
                                                                Annual Net Total Amount Awarded for Set-Asides
                                                                Cumulative Spending Rate
                                                     2% Small System Technical Assistance Set-Aside

                                                              States: 46 spent and 37 set aside
                                                              Set aside: $12 million ($5 million decrease)
                                                              Spent: $13.9 million (no change)
                                                              Note: number of systems receiving technical
                                                             [assistance increased by 14%

                                                              Set aside: $123 million
                                                              Spent: $84 million
                                                              Spending Rate: 69%
                                                              Remaining Balance:  $39 million
                                                         EXHIBIT 33
                                                                  Small System Technical Assistance Set-Aside
                                                                    Amount Annually Awarded and Expended
                                                                                                            80%
                                                                    Cumulative Set-Aside Reserve
                                                                    Total Annual Set-Aside Activity Dollars Expended/Committed
                                                                    Annual Net Total Amount Awarded for Set-Asides
                                                                    Cumulative Spending Rate
                                                                26

-------
    10% State Program Management Set-Aside
           States: 44 spent and 33 set aside
           Set aside: $43 million ($7 million decrease)
           Spent: $45 million ($2 million increase)
           Note: states spent more for PWSSs and Capacity
           Development programs

           Set aside: $372 million
           Spent: $271 million
           Spending Rate: 70%
           Remaining Balance: $100 million
           Note: 60% of spending on PWSSs
       EXHIBIT 35    2006 Annual Program Management
                         Set-Aside Expenses
                                         PWSS Administration

                                         Source Water Protection

                                         Capacity Development

                                         Operator Certification
                                                           EXHIBIT 34
                                                State Program Management Set-Aside
                                               Amount Annually Awarded and Expended
                                             Cumulative Set-Aside Reserve
                                             Total Annual Set-Aside Activity Dollars Expended/Committed
                                             Annual Net Total Amount Awarded for Set-Asides
                                             Cumulative Spending Rate
    15% Local Assistance and Other State Programs Set-Aside
           States: 39 spent and 29 set aside
           Set aside: $35 million ($6.5 million decrease)
           Spent: $30 million (no change from 2005)
           Note: technical and financial assistance provided
           to nearly 5,000 systems

           Set aside: $415 million
           Spent: $256  million
           Spending Rate: 62%
           Remaining Balance: $159  million
           Note: spending rate has decreased as spending
           on source water protection has dropped
       EXHIBIT 37
                    Local Spending by Category of the
               Local Assistance and Other State Programs Set-Aside
         501
        40
         30
         20
         10
.ilHln
                                        EXHIBIT 36

                                           Local Assistance and Other State Programs Set-Aside
                                               Amount Annually Awarded and Expended
                                             Cumulative Set-Aside Reserve
                                             Total Annual Set-Aside Activity Dollars Expended/Committed
                                             Annual Net Total Amount Awarded for Set-Asides
                                             Cumulative Spending Rate
• Technical or Financial Assistance to
 PWSs for Capacity Development
• Wellhead Protection Programs

• SWPArea Delineation & Assessment
 Loans for Incentive-Based SWP
 Measures
 Loans for Land Acquisition &
 Conservation Easements
27

-------
 DWSRF
     awards  for sustainable
 PUBLIC  HEALTH  PROTECTION
The 2006 Drinking Water State Revolving Fund
Awards for Sustainable Public Health Protection
recognize projects that exemplify exceptional
creativity, effectiveness, and dedication to public
health protection.  Program flexibility and innovation
are central to the DWSRF, and since the program's
inception in 1997, borrowers and their supporters
have continually impressed EPA with their creative
and innovative approaches to  protecting public
health.

Projects were nominated by states and were
required to meet several criteria to be eligible for
an award.  To further the public health goals of the
DWSRF program and  to encourage transparency,
three criteria were mandatory for project elligibility:

    Compliance with  the Safe Drinking Water Act
    Financial integrity, demonstrated by audits or
    financial reviews
    High ranking on the state's Project Priority List

In addition, leadership was required in at least one
of the following four criteria: innovative financing,
innovative approach to planning and/or project
implementation, creative use of partnerships, and
promotion of sustainable infrastructure.

The winners were acknowledged at the national
Council for Infrastructure Finance Authorities
(CIFA) meeting in Philadelphia, PA in November
2006.  Information highlighting these programmatic
successes is available on EPA's DWSRF Web site
and has been distributed to DWSRF loan recipients
around the country.

-------
       award   recipients
            region 8

        MAGNA WATER COMPANY
                                                         FORT PECK/DRY PRAIRIE
                                                         RURAL WATER AUTHORITY
                                                         MT
UT
        Problem:  High levels of arsenic and perchlorate in the ground
        water.
        DWSRF Assistance: $6 million DWSRF loan in combination
        with $12 million in grants.
        Solution:  A new treatmet plant that employs electrodialysis
        reversal to reduce arsenic and perchlorate and a fixed-bed
        bioreactorto further minimize perchlorate.
Problem: High IDS, sulfates, iron, and manganese in water supplies on the
Fort Peck Indian Reservation.
DWSRF Assistance: $10.7 million DWSRF loan.
Solution: A centralized water treatment plant and 3,200 miles of pipeline to
deliver the treated water to customers.
              CITY OF PvIVERTON
                                               WY
region 9

 CITY OF SANTA BARBARA

 CA
        Problem: Inability to keep pace with new surface water
        treatment requirements.
        DWSRF Assistance: $1.49 million DWSRF loan.
        Solution: A water treatment plant rehabilitation that included
        replacing and upgrading filters, replacing air actuated valves,
        improving the waste handling system, and equipping the
        plant with corrosion and pH control capabilities.
 Problem: An uncovered reservoir susceptible to wind-blown contaminants
 and post-storage chlorination that resulted in high levels of disinfection
 byproducts.
 DWSRF Assistance: $20 million DWSRF loan.
 Solution: Sheffield Water Quality Project replaced the open storage
 reservoir with two, 6.5 million gallon buried storage reservoirs.
                                                  TRUCKEE MEADOWS WATER AUTHORITY
                                                  NV
                                                  Problem: Untreated wells with high arsenic levels.
                                                  DWSRF Assistance: A nearly $4.7 million DWSRF loan.
                                                  Solution: A conveyance system that transports well water to the Authority's
                                                  existing surface water treatment facility.
                         FLOWING WELLS IRRIGATION DISTRICT
                         AZ
                        Problem: Arsenic levels in excess of the new 10ppb standard.
                        DWSRF Assistance: $1 million DWSRF loan. ^
                        Solution: Treatment plant that uses granular iron media in pressure vessels
                        and a backwash tank to remove the naturally-occurring arsenic.
                                               CITY AND COUNTY OF HONOLULU
                                            HI
                                               Problem: High nitrate and agricultural pesticides levels, an alachlor-
                                               contaminated well, and a deteriorating distribution system.
                                               DWSRF Assistance:  $21  million DWSRF loan.
                                               Solution: Oahu constructed new water treatment facilities to remove
                                               nitrate and agricultural pesticides; the State's largest PWS, Weimanalo,
                                               replaced the alachlor-contaminated well; and Ewa Beach and Wahiawa
                                               made distribution system improvements.
   29

-------
                                                             region 1
                                                               CARIBOU UTILITIES
                                                                                           ME
       region 5

   CITY OF THORP
                          wi
   Problem:  Low capacity wells with bacteriological and radionuclide
   contamination.
   DWSRF Assistance: $1.2 million DWSRF loan.
   Solution:  New wells, a water storage facility, a water pressure boosting
   station, and upgraded water treatment processes to reduce radon and
   uranium levels.
            Problem: Threat of surface water contamination and high levels of disinfection
            byproducts.
            DWSRF Assistance: $1.8 million DWSRF loan combined with $1.2 million
            in USDA Rural Development Program funds and $300,000 from the Maine
            Community Development Block Grant (CDBG) Program.
            Solution: Two gravel packed water wells, a new pump station, and new water
            mains to  replace the surface water source, and a new disinfection/treatment
            facility to reduce the use of treatment chemicals.
                                                                 WATERVILLE FIRE DISTRICT
                                                                                      VT
  CITY OF HUTCHINSON
                      MN
  Problem: High ammonia levels in drinking water that caused the
  water to be corrosive and leach copper from household plumbing
  into drinking water.
  DWSRF Assistance: DWSRF loans totaling $14 million.
  Solution: A new membrane softening and biological filtration
  treatment plant to remove ammonia from the water, thereby
  reducing  copper leaching.
              Problem: Bacteriological contamination due to insufficient disinfection
              capacity and discharge of chlorinated water from storage tank
              overflow.
              DWSRF Assistance:  $425,000 DWSRF loan.
              Solution: A new control  building to house disinfection and corrosion
              control equipment, meters, and alarm/control systems, and two new
              4,500 gallon distribution storage reservoirs.
                           GREEN TOWNSHIP, BROWN COUNTY   OH

                           Problem: Positive bacteria samples in Green Township's
                           groundwater supply.
                           DWSRF Assistance: $397,188 DWSRF loan combined with a
                           $210,000 Brown County CDBG.
                           Solution: Highland County Water Company extended 13.8 miles of
                           water lines to serve the residents of Green Township.
                  region 4

                      GRAND BAY WATER WORKS
                                          AL
                                                    r
                      Problem:  Limited storage capacity and several failing private wells.
                      DWSRF Assistance: Approximately $1 million in DWSRF loans.
                      Solution:  5 miles of water line to reach residents that had relied on
                      the failing wells and a new, one million gallon elevated water tank.
CULKIN WATER DISTRICT
1   ^
MS
Problem: Filter backwash facility that was discharging effluent that
exceeded National Pollutant Discharge Elimination System (NPDES)
limitations.
DWSRF Assistance: $825,878 DWSRF loan.
Solution: Modifying the District's water treatment to minimize water
wasted through the filter backwash process and new facilities that
recycle clarified filter backwash.
JEFFERSON COMMUNITIES WATER SYSTEM,
JEFFERSON COUNTY,                         FL

Problem: Several contaminated private wells and non-community
water systems in Jefferson County in close proximity to pollution point
sources.
DWSRF Assistance: DWSRF loan.
Solution: A regional water system consisting of wells, elevated tanks,
distribution facilities, controls, and services.
                                                                                                                       30

-------
    more      ,
      award   recipients
   region 10
          MUD BAY WATER SYSTEM
   CITY OF HOMER
          Problem:  Risk of microbial contamination in surface springs and an
          aging distribution system.
          DWSRF Assistance: $931,779 DWSRF loan combined with a
          $440,000 CDBG.
          Solution:  A new well to replace the GWUDI-classified spring source
          and distribution system improvements.
                                                      CITY OF MCCOOK
                                                     NE
                                                      Problem: Elevated uranium, nitrate, and arsenic levels in the
                                                      ground water supply, and a reservoir contaminated by a diesel
                                                      spill.
                                                      DWSRF Assistance: $9.9 million DWSRF loans in combination
                                                      with a $3.3 million settlement from a diesel spill lawsuit.
                                                      Solution: Two new wells, a new water treatment facility that
                                                      removes uranium, nitrates, and arsenic from the groundwater, a
                                                      new 4 million gallon reservoir, and a booster pump station.
                                                                CITY OF CHEROKEE
                                                             OK
AK
   Problem: Private wells providing poor quality water and at
   risk of contamination from nearby septic systems.
   DWSRF Assistance: $4,386,603 DWSRF loan.
   Solution: The City of Homer extended its drinking water
   distribution system to the residents served by the private
   wells.
Problem: High nitrate levels.
DWSRF Assistance: $1.46 million DWSRF loan; $250,000
CDBG; $65,000 OWRB Emergency Grant; $99,999 REAP
Grant; and $44,000 in local funds.
Solution: A reverse osmosis water treatment plant to treat
the water supply and reduce nitrates in finished water.
                                                 CITY OF BLOOMFIELD
                                            NM
                                                 Problem: Inability to meet federal standards for drinking
                                                 water turbidity.
                                                 DWSRF Assistance: $3,737,000 DWSRF loan.
                                                 Solution: The construction of a new filtration system to
                                                 meet turbidity requirements.
31

-------
                          region  3

           EASTERN WYOMING PSD/
           LOGAN COUNTY PSD
                                              region 2
                                                WASHINGTON TOWNSHIP
                                                MUNICIPAL UTILITIES AUTHORITY
                                                Problem: Elevated radium contamination.
                                                DWSRF Assistance: Two DWSRF loans totaling $3.9 million.
                                                Solution: A new water treatment plant consisting of iron sequestration,
                                                radium removal by DOWEX Radium Selective Complexer (RSC), pressure
                                                filtration,  packed column aeration, pH adjustment, fluoridation, and
                                                disinfection.
wv
           Problem: Eleven flooded, failing, or abandoned water
           systems, unable to consistently provide safe drinking water
           to area residents.
           DWSRF Assistance: $3.5 million DWSRF loan.
           Solution: Consolidate and upgrade the failing water
           systems and build a new regional water treatment plant,
           three 300,000 gallon storage tanks,  approximately 106,000
           feet of water lines, 84 fire hydrants, valves, and individual
           customer service meters.
                                               AR
Problem:  The lack of technical, managerial, and financial capacity to
meet requirements of the SDWA at two wholesale systems.
DWSRF Assistance: $6 million in DWSRF loans.
Solution:  Texarkana bought the wholesalers and made $3.8 million in
upgrades to bring the systems into SDWA compliance.
POSSUM KINGDOM WATER
SUPPLY CORPORATION
Problem:  Multiple noncompliant, private small systems without
disinfection using source water containing high levels of chlorides,
sulfates, and total dissolved solids (TDS).
DWSRF Assistance: $4.7 million DWSRF loan and $6.5 million in
USDA Rural Development funds.
Solution:  Possum Kingdom purchased and consolidated the small
systems. Possum Kingdom installed a new water intake plant and a
water filtration plant to remove chlorides, sulfates, and TDS.
           AQUA PENNSYLVANIA
           BRISTOL BUREAU
    PA
           Problem: A 120 year-old, structurally unstable, and unreliable
           water treatment facility.
           DWSRF Assistance:  An approximately $6 million DWSRF loan.
           Solution: Aqua Pennsylvania purchased the old facility and made
           upgrades that include: solids removal equipment installation,
           chlorination and electrical system upgrades, automated filters and
           controls, a central computer system, and roof replacement.
               TOWN OF BOONSBORO
MD
               Problem: The threat of surface water contamination in
               Boonsboro and neighboring Keedysville.
               DWSRF Assistance: $1.4 million DWSRF loan in
               combination with $1.5 million in state grants.
               Solution: A new regional water treatment plant to serve
               both affected communities and new water filtration plants
               in Boonsboro and Keedysville interconnected with a new
               12-inch water line.

                                                                RER ENVIRONMENTAL ENGINEERING
                                                                SERVICES, CITY OF SAN JUAN
                                                               PR
             Problem: Small communities that lack the managerial, technical,
             and financial capacity to comply with the SDWA.
             DWSRF Assistance: $160,000 DWSRF loan.
             Solution: A Capacity Development pilot project that includes a
             Comprehensive Performance Evaluation (CPE) to measure
             community water systems' capacity to comply with the SDWA.
             Participating communities subsequently develop an action plan, and
             circuit riders facilitate follow-up actions.
                                                                                                             32

-------
               FINANCIAL
highlights
   Each of the 51 DWSRF programs produces its
   own financial reports and statements. EPA has
   produced financial statements for the DWSRF
   program nationally based on data reported by
   the states to EPA's National Drinking Water
   Information Management System. For the
   national DWSRF program (representing all 51
   separate DWSRFs),  EPA provides:

       A Statement of Net Assets
       A Statement of Revenues, Expenses,
       and Earnings
       A Statement of Cash Flow

   These statements are best thought of as non-
   audited financial reports. Page 35 showcases
   some highlights of the 2006 financial statements
   for the DWSRF programs.
                              Statement of Net Assets

                              This statement (Exhibit 41) describes the fund's
                              assets and liabilities as of the end of the fund's
                              fiscal year. Assets include both financial and
                              capital assets. Liabilities include both current and
                              long-term liabilities. The DWSRF assets include
                              grant funds that have been drawn from the federal
                              treasury but do not include total grant awards.

                              Total assets of the loan funds were $11 billion
                              in 2006, an increase of 15 percent over 2005.
                              Outstanding loans account for 68 percent of
                              the funds' assets. Cash and cash equivalents
                              account for the remaining 32 percent of the funds'
                              assets. The funds' liabilities consist of leverage
                              bonds and match bonds.  Outstanding leverage
                              bonds increased by 13 percent, to $4 billion,  in
                              2006.  Match bonds were $321 million in 2006, an
                              increase of 11 percent over 2005. State and  federal
                              contributions comprise over 90 percent of the $6.7
                              billion in net assets.
                                           The set-aside funds had total assets of $6.9 billion
                                           in 2006. This is an increase of 7 percent over 2005.
                                           They have no liabilities.
                      DWSRF ASSETS
      10.0


       8.0

      >
       6.0
      /)


       4.0


       2.0


       0.0'
I Total Assets
 Unamortized Bond Issuance Expenses
 Loans Outstanding
• Leveraged Bonds
 Cash and Cash Equivalents
         O5
         O5
co
O5
O5
O5
O5
O5
O
o
O
CM
O
o
CXI
CXI
o
o
CXI
ro
o
o
CXI
o
o
CXI
LO
o
o
CXI
CD
o
o
CXI

-------
EXHIBIT 39
             DWSRF Assets and Liabilities
   12.0

   10.0
 v> 8.0
 "5
   0.0
I Total Liabilities and Net Assets
-Total Liabilities
 Total Net Assets
Statement of Revenue, Expenses,
and Net Earnings

This statement (page 36) describes the performance
of the funds over the reporting period. Annual
operating revenues of the loan funds increased by
$67.3 million between 2005 and 2006, an increase
of more than 31 percent; 60 percent of this increase
came from interest on fund investments and the
remainder from interest on DWSRF loans. Annual
operating expenses rose $21.9 million to $176
million, a 14 percent increase over 2005.  Net non-
operating revenue rose by $74.1 million, due largely
to an 18 percent increase in federal contributions
between 2005 and 2006.  Total revenue of the loan
fund exceeded total expenses in 2006 by $997
million, a 14 percent increase over 2005.

The operating revenues and expenditures of the
set-aside funds had only minor changes between
2005 and 2006. Small system technical assistance
remained steady at $13.9 million. Administrative
assistance increased by 5 percent to $29.8
million. State  program management assistance
increased by 4.5 percent to $45.3 million. Grants
made under the set-aside programs increased
slightly by $140,000, or less than 1 percent. The
federal contribution increased 3 percent to $118
million. Revenues exceeded expenditures by only
$400,000.
This statement (Exhibit 41) provides a detailed
accounting of the flow of cash into and out of
the DWSRF programs.  For the loan fund, loan
disbursements to be repaid totaled $1.4 billion in
2006, a 16.3 percent increase over 2005. Cash
draws from the federal capitalization grants rose
by $113 million over 2005; state contributions fell
by $8.6 million.  Gross leveraged bond proceeds
rose by $54.7 million. Overall, cash and cash
equivalents increased by $257 million as
compared to an increase of $139 million in 2005.

Total cash flows for operating expenses were
$200,000 higher in 2006 than 2005. The federal
contribution increased by $3.6 million (or 3
percent), while the net grants from 1452(k) set-
asides were higher.
                                         EXHIBIT 40
                                                       Annual Operating Revenues
                                           400

                                           350

                                           300
                                         t&
                                         "5 250
                                         in
                                         I 200

                                         2 150

                                           100

                                            50
            I Total Operating Revenues
             Interest on DWSRF Loans
            • Interest on Fund Investments

-------
    6  FINANCIAL STATEMENT  IlIGt  JGHTS
Statement of Net Assets

    Total assets increased by $1.5 billion between 2005 and 2006;
    DWSRF program equity (also called net assets) totals $6.7 billion.
    Program liabilities increased by $477 million, reflecting the net growth
    in DWSRF bonds outstanding for state matching funds and leveraged
    program financing.


Statement of Revenues, Expenses, and
Earnings

    Total program revenues exceed expenses by $997 million, a 14
    percent increase from 2005.
    Interest earnings from loans and investments totaled more than $67.3
    million.
    Administrative expenses were 8.6 percent of operating revenues.
Statement of Cash Flows

    Loan principal repayments to DWSRF
    programs were $353.4 million.
    Leveraged bond proceeds added $563.8
    million to program cash flow

                                     *,-

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    FINANCIAL
statements
EXHIBIT 41
Balance Sheet (Loan Funds) in $ Millions

Assets
Cash and Cash Equivalents
Debt Service Reserve - Leveraged Bonds
Loans Outstanding
Unamortized Bond Issuance Expenses
Total Assets
Liabilities
Match Bonds Outstanding
Leveraged Bonds Outstanding
Total Liabilities
Net Assets
Federal Contributions
State Contributions
Transfers - Other SRF Funds
Other Net Assets
Total Net Assets
Total Liabilities and Net Assets
Balance Sheet (Set-Aside Funds) in $ Millions

Assets
Cash and Cash Equivalents
Loans Outstanding
Total Assets
Liabilities
Total Liabilities
Net Assets
Federal Contributions
Other Net Assets
Total Net Assets
Total Liabilities & Net Assets

2006

2,790.8
1,227.1
6,921.9
53.0
10,992.8

321.1
3,960.7
4,281.8

4,683.5
1,367.8
374.1
285.6
6,710.9
10,992.8

2006

2.2
4.7
6.9

0

820.8
(813.9)
6.9
6.9

2005

2,533.4
1,087.7
5,850.1
48.0
9,519.2

290.1
3,514.7
3,804.8

3,933.6
1,260.4
354.8
165.5
5,714.4
9,519.2

2005

1.5
4.9
6.4

0

702.5
(696.0)
6.4
6.4

2004

2,394.7
865.2
4,897.3
44.2
8,201.5

256.6
3,107.7
3,364.2

3,297.0
1,144.4
310.1
85.7
4,837.3
8,201.5

2004

1.1
4.9
6.1

0

587.7
(581 .6)
6.1
6.1

2003

1,976.9
628.6
3,913.9
34.6
6,553.9

194.7
2,387.9
2,582.6

2,588.1
1,001.1
318.4
63.7
3,971.3
6,553.9

2003

0.9
2.4
3.3

0

475.3
(472.0)
3.3
3.3

2002

1,757.4
520.9
3,012.8
31.5
5,322.6

174.4
2,012.5
2,186.9

1,996.9
847.8
231.6
59.4
3,135.7
5,322.6

2002

0.5
2.5
2.9

0

355.2
(352.2)
2.9
2.9
                      36

-------
EXHIBIT 41 CONTINUED
Income Statement (Loan Funds) in $ Millions

Operating Revenues
Interest on Fund Investments
Interest on DWSRF Loans
Total Operating Revenues
Operating Expenses
Bond Interest Expense
DWSRF Funds Used for Refunding
Amortized Bond Issuance Expense
Total Operating Expenses
Nonoperating Revenues and Expenses
Federal Contribution
State Contributions
Loan Forgiveness Expenses
Transfers from (to) CWSRF
Total Nonoperating Revenues and Expenses
Increase (decrease) in Net Assets
Net Assets
Beginning of Year
End of Year
Income Statement (Set-Aside Funds) in $ Millions

Operating Revenues
Interest on 1452(k) Loan Account Investments
Interest on 1452(k) Loans
Total Operating Revenues
Operating Expenses
Administrative Expenses Under the 4% Set-Aside
Expenses Under the 2% Set-Aside,
Small Systems Technical Assistance
Expenses Under the 10% Set-Aside,
State Program Management
Grants made under the 1452(k) Set-Aside
Total Expenses
Nonoperating Revenues and Expenses
Federal Contribution
Total Nonoperating Revenues (Expenses)
Increase (decrease) in Net Assets
Net Assets
Beginning of Year
End of Year

2006

145.5
198.0
343.5

169.7
3.9
2.4
176.1

749.9
107.4
(47.4)
19.3
829.1
996.6

5,714.4
6,710.9

2006

0.06
0.08
0.14

29.8

13.9

45.3
29.1
118.0

118.3
118.3
0.4

6.4
6.9

2005

105.0
171.2
276.2

149.8
2.1
2.2
154.2

636.6
116.0
(42.2)
44.7
755.0
877.1

4,837.3
5,714.4

2005

0.02
0.03
0.06

28.3

13.9

43.3
28.9
114.4

114.8
114.8
0.4

6.1
6.4

2004

67.9
148.5
216.4

116.1
31.1
1.7
148.9

708.9
143.3
(45.5)
(8.3)
798.4
866.0

3,971.3
4,837.3

2004

0.01
0.04
0.05

26.8

11.5

38.9
32.4
109.7

112.4
112.4
2.8

3.3
6.1

2003

74.3
115.5
189.8

96.1
47.1
1.6
144.8

591.2
153.4
(40.7)
86.8
790.7
835.7

3,135.7
3,971.3

2003

0.01
0.04
0.04

27.8

10.7

40.5
40.9
119.8

120.1
120.1
0.4

2.9
3.3

2002

72.4
86.5
158.9

75.2
0.8
1.3
77.3

692.2
180.4
(47.8)
75.9
900.8
982.3

2,153.3
3,135.7

2002

0.01
0.03
0.04

28.5

10.2

35.6
42.7
117.0

118.1
118.1
1.1

1.8
2.9

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Cash Flows (Loan Funds) in $ Millions

Operating Activities
Cash Draws from Federal Capitalization Grants
Contributions from States
Loan Disbursements to be Repaid
Loan Principal Forgiven
Loan Principal Repayments
Interest Received on Loans
Total Cash Flows from Operations
Noncapital Financing Activities
Gross Leveraged Bond Proceeds
Bond Issuance Expense
State Match Bond Proceeds
Cash Received from Transfers with CWSRF
Interest Paid on Leveraged and State Match Bonds
DWSRF Funds Used for Refunding
Principal Repayment of Leveraged Bonds
Principal Repayment of State Match Bonds
Total Cash Flows from Noncapital Financing Activities

2006

749.9
107.4
(1,425.2)
(47.4)
353.4
198.0
(64.0)

563.8
(7.4)
49.3
19.3
(169.7)
(3.9)
(117.7)
(18.4)
315.2
Cash Flows from Capital and Related Financing Activities 0
Investing Activities
Interest Received on Fund Investments
Deposits to Debt Service Reserve for Leveraged Bonds
Total Cash Flows from Investing Activities
Net Increase (Decrease) in Cash and Cash
Equivalents
Beginning Balance (Cash and Cash Equivalents)
Ending Balance (Cash and Cash Equivalents)
Cash Flows (Set-Aside Funds) in $ Millions

Operating Activities
Federal Contribution
1452(k) Loan Disbursements Made to Borrowers
1452(k) Loan Principal Repayments
Interest Received on 1452(k) Loans
Administrative Expenses Under the 4% Set-Aside
Expenses Under the 2% Set-Aside,
Small Systems Technical Assistance
Expenses Under the 10% Set-Aside,
State Program Management
Grants made under the 1452(k) Set-Aside
Total Cash Flows from Operating Activities
Noncapital Financing Activities
Net Cash Provided by Noncapital Financing Activities

145.5
(139.3)
6.2
257.5

2,533.4
2,790.8

2006

118.3
(0.3)
0.5
0.1
(29.8)
(13.9)
(45.3)
(29.1)
0.6

0
Cash Flows from Capital and Related Financing Activities 0
Investing Activities
Interest Earnings on 1452(k) Loan Account Investments
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)

0.06
0.1
0.7

1.5
2.2

2005

636.6
116.0
(1,225.2)
(42.2)
272.5
171.2
(71.2)

509.0
(6.0)
50.4
44.7
(149.8)
(2.1)
(102.0)
(16.9)
327.3
0

105.0
(222.5)
(117.5)
138.6

2,394.7
2,533.4

2005

114.8
(0.3)
0.4
0.0
(28.3)
(13.9)
(43.3)
(28.9)
0.4

0
0

0.02
0.0
0.4

1.1
1.5

2004

708.9
143.3
(1,223.4)
(45.5)
240.0
148.5
(28.2)

800.7
(11.4)
75.4
(8.3)
(116.1)
(31.1)
(80.9)
(13.5)
614.8
0

67.9
(236.6)
(168.7)
417.8

1,976.9
2,394.7

2004

112.4
(2.7)
0.2
0.0
(26.8)
(11.5)
(38.9)
(32.4)
0.2

0
0

0.01
0.0
0.2

0.9
1.1

2003

591.2
153.4
(1,056.3)
(40.7)
155.2
115.5
(81.7)

433.4
(4.6)
29.0
86.8
(96.1)
(47.1)
(58.0)
(8.6)
334.6
0

74.3
(107.7)
(33.4)
219.5

1,757.4
1,976.9

2003

120.1
(0.3)
0.4
0.0
(27.8)
(10.7)
(40.5)
(40.9)
0.4

0
0

0.01
0.0
0.4

0.5
0.9

2002

692.2
180.4
(1,022.5)
(47.8)
116.4
86.5
5.3

587.9
(6.6)
65.9
75.9
(75.2)
(0.8)
(46.1)
(4.1)
596.9
0

72.4
(83.2)
(10.9)
591.4

1,166.0
1,757.4

2002

118.1
(1.1)
0.1
0.0
(28.5)
(10.2)
(35.6)
(42.7)
0.2

0
0

0.01
0.0
0.2

0.3
0.5
38

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       DWSRF
Istate   agencies
                       w-
                        EPA REGION 1

                Connecticut Department of Public Health
                Connecticut Department of Environmental Protection
                Connecticut Office of the Treasurer
                Connecticut Department of Public Utility Control
                Maine Department of Human Services
                Maine Municipal Bond Bank
                Massachusetts Water Pollution Abatement Trust
                Massachusetts Division of Municipal Services
                Massachusetts Division of Watershed Management- Drinking Water Program
                New Hampshire Department of Environmental Services
                Rhode Island Clean Water Finance Agency
                Rhode Island Department of Health
                Vermont Water Supply Division
                Vermont Facilities Engineering Division


                                              EPA PvEGION 2

                                      New Jersey Department of Environmental Protection
                                      New Jersey Environmental Infrastructure Trust
                                      New York State Department of Health
                                      New York State Environmental Facilities Corporation
                                      Puerto Rico Department of Health
                                      Government Development Bank for Puerto Rico
                                      Puerto Rico Infrastructure Financing Authority
        EPA PvEGION 3

Delaware Department of Health and Social Services
Delaware Department of Natural Resources and Environmental Control
Maryland Water Quality Financing Administration
Maryland Water Management Administration
Pennsylvania Infrastructure Investment Authority (PENNVEST)
Pennsylvania Department of Environmental Protection
Virginia Department of Health - Office of Drinking Water
Virginia Resources Authority
West Virginia Department of Health and Human Resources
West Virginia Water Development Authority
                                       EPA REGION 4

                                Alabama Department of Environmental Management
                                Florida Department of Environmental Protection
                                Georgia Environmental Facilities Authority
                                Georgia Environmental Protection Division
                                Kentucky Infrastructure Authority
                                Kentucky Division of Water, Drinking Water Branch, Environmental and Public Protection Cabinet
                                Mississippi State Department of Health
                                Mississippi Department of Environmental Quality
                                Mississippi State Tax Commission
                                North Carolina Department of Environment and Natural Resources
                                South Carolina Department of Health and Environmental Control
                                South Carolina Budget and Control Board
                                Tennessee Department of Environment and Conservation
                                Tennessee Comptroller of the Treasury

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                                                                      EPA REGION 5

                                                              Illinois Environmental Protection Agency
                                                              Indiana Department of Environmental Management
                                                              Indiana Finance Authority
                                                              Indiana State Revolving Fund Loan Program
                                                              Michigan Department of Environmental Quality
                                                              Michigan Municipal Bond Authority
                                                              Minnesota Public Facilities Authority
                                                              Minnesota Department of Health
                                                              Ohio Environmental Protection Agency
                                                              Ohio Water Development Authority
                                                              Wisconsin Department of Natural Resources
                                                              Wisconsin Department of Administration
        EPA PvEGION 6

Arkansas Natural Resources Commission
Arkansas Department of Health
Louisiana Department of Health and Hospitals
Louisiana Department of Environmental Quality
Oklahoma Department of Environmental Quality
Oklahoma Water Resources Board
New Mexico Finance Authority
New Mexico Environment Department
Texas Water Development Board
Texas Commission on Environmental Quality
        EPA PvEGION 7

Iowa Department of Natural Resources
Iowa Finance Authority
Kansas Department of Health and Environment
Kansas Department of Administration
Kansas Development Finance Authority
Missouri Department of Natural Resources
Nebraska Department of Environmental Quality
        EPA REGION 8

 Colorado Water Resources and Power Development Authority
 Colorado Water Quality Control Division
 Colorado Department of Local Affairs - Division of Local Government
 Montana Department of Environmental Quality
 Montana Department of Natural Resources and Conservation
 North Dakota Department of Health
 North Dakota Public Finance Authority
 South Dakota Department of Environment and Natural Resources
 Utah Department of Environmental Quality - Division of Drinking Water
 Wyoming Office of State Lands and Investments
 Wyoming Department of Environmental Quality
 Wyoming Water Development Office
         EPA REGION 9

 Arizona Water Infrastructure Finance Authority
 California Department of Health Services
 Hawaii Department of Health
 Hawaii Safe Drinking Water Branch
 Hawaii Wastewater Branch
 Nevada Division of Environmental Protection
 Nevada Office of Financial Assistance
                                       EPA REGION 10

                               Alaska Department of Environmental Conservation
                               Alaska Department of Environmental Conservation - Division of Environmental Health
                               Idaho Department of Environmental Quality
                               Oregon Department of Human Services
                               Oregon Economic and Community Development Department
                               Oregon Department of Environmental Quality
                               Washington State Department of Health
                                                                                                            40

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                                 "The key to development is infrastructure.  Pawtucket has
                                 had the foresight to undergo aggressive redevelopment of
                                 the infrastructure to revitalize the city."
                               Despite over $27 million
                               in existing debt and
                               substantial districting
                               obstacles, the City of
                               Pawtucket is using
                               a nearly $75 million
                               DWSRF loan to complete
                               an exhaustive, source-
                               to-tap overhaul of the
                               City's water system.
                               Cooperation at the
                               community and State
                               level was essential in
                               securing the loan and
  helping the project achieve its potential to positively impact
  public health.

  Pawtucket's water treatment plant dated back to 1938, and
  some of the system's distribution system pipes back to the
  1800s. The old pipes, made of unlined cast iron, caused
  discoloration and rusty water resulting in taste and odor
  problems. Excessive pipe biofilm required the system to
  use high  levels of chlorine to disinfect, and subsequently
  resulted in the formation of disinfection by-products  (DBPs).
  The old pipes were also subject to breaks that disrupted
  service and made water susceptible to contamination. DBP
  levels were exacerbated by Pawtucket's source water, which
  has high  levels of total organic carbon (TOC), a precursor to
  DBPs. Therefore, the impending Stage 2 DBPR presented
  significant compliance challenges.
Pawtucket's first step to improving its water quality
was to work with the state DWSRF to find a way
to restructure its existing debt outside the DWSRF.
This restructuring enabled Pawtucket to take on the
DWSRF loans needed to make the complete source-
to-tap overhaul. The first DWSRF loan, made in
2004, was for $41,875,000 at 2.4 percent interest,
and the second, borrowed in 2005, was $31,909,000
at 2.8 percent interest.

Pawtucket is building a new 25 million gallon a
day (MGD) treatment plant with the first loan.  The
plant employs granulated activated carbon (GAG)
media to lower turbidity levels and extract particles
to resolve the problematic taste and odor issues,
DBPs, and synthetic organics.  UV technology will
be used to protect the system against pathogens.
The loan is also financing a pump station, residual
lagoons, and a 5-million-gallon storage tank that
will bring the system to full operating capacity. The
State demonstrated its dedication to this project by
donating the land on which Pawtucket is building  its
treatment plant.
The second loan is enabling Pawtucket to update
its out-dated distribution system, financing the
replacement of more than 160 miles of 6- and 8-inch
mains.  Since the beginning of the rehabilitation,
DBPs have dropped by 60 percent and there have
been no total coliform-positive results.

"The good thing about the DWSRF was
the flexibility  the state was able to
demonstrate to  help stabilize the rates
and minimize rate shock."

- Pawtucket  Water Supply Board
 >tate Revolving Fund, please contact
Drinking Water State Revolving Fund Program
U.S. Environmental Protection Agency
1201 Constitution Avenue, NW (Mailcode 460i
Washington, DC 20004

Phone: (202) 564-2051
Fax: (202) 564-3757
Internet: www.epa.gov/safewater/dwsrf

Office of Ground Water and Drinking Water
June 2007
EPA816-R-07-002

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