Environmental Protection
              Investing in a


              2007 ANNUAL REPORT


     70% -
     60% —
     50% -
     40% -
    Exhibit 1: Cumulative Growth
    from 2003 to 2007
                                                                  2007  Highlight:
                                                                  For the Drinking Water State Revolving Fund
                                                                  (DWSRF) program,  2007  was  yet  another
                                                                  year of strong growth.  The DWSRF program
                                                                  continued its trend of acceleration and financial
                                                                  performance  in  several key areas  indicates
                                                                  that the DWSRF is growing at an even faster
                                                                  pace  than  contributions  from  federal and
                                                                  state governments.  Exhibit  1 summarizes the
                                                                  cumulative result of these successes over the past
                                                                  5 years (2003-2007).
                                                             Baseline for growth, based on
                                                             increase in cumulative net
                                                             investments into the DWSRF
                                                             from 2003 to 2007
         in the DWSRF
Available for
Drinking Water
Set-A side
     > Net Investments in the DWSRF: Annual federal allocations of about $850 million and state matches from 2003 to
       2007 have increased cumulative investments by 60%. This increase forms the baseline for comparison.
     > Funds Available for Assistance: This 78% increase was fueled by state leveraging and principal and interest
       payments, which show the power of the program to greatly multiply federal investments.
     > Drinking Water System Repayments:The recycled revenue stream increased by an astounding 304%.
     > Assistance Provided: Assistance to drinking water systems more than doubled.
     > Disbursements: Draws on loan agreements by drinking water systems increased by 127%, due to the increasing
       pace of construction activity, delivering increased public health protection.
     > Set-Aside Spending: States nearly doubled their set-aside spending, providing critical support to programs
       ensuring sustainable public health protection and further expanding the impact of the DWSRF beyond those
       drinking water systems receiving loans.
Office of Water (4606M)
March 2008
www.e pa .g ov/saf e wa te r

America's Public Water Systems:
Every day, hundreds of millions of Americans consume
drinking water supplied by more than 155,000 public
drinking water systems (PWSs). PWS operators and
managers work tirelessly to ensure the safety of their product
and the reliability of their service. The DWSRF program,
a 10-year old partnership between the U.S. Environmental
Protection Agency (EPA) and each state, has become the
primary public financing source for these utilities, enabling
them to invest in infrastructure improvements that are
critical to public health protection. The result is sustained
public health protection for millions of Americans today and
for generations to come.
                                  Table  of Contents
                                  1. Public Health Success
                                  2. Financial Success
                                  4. Future of the DWSRF
                                  5. Financial Details
                                  3. Achieving Sustainable Infrastructure    20
 PWS Size
Number of PWSs   People Served*
Small (< 10,000 served)
Medium (10,000-50,000)
Large (50,001-100,000)
Very Large (> 100,000)
                  306, 537,356
 "Some individuals are served by multiple PWSs.

From the
    Benjamin H. Grumbles
    Office of Water
    I am pleased to present the Drinking Water State Revolving Fund's (DWSRFs) 2007
    Annual Report. The DWSRF is now a $14.4 billion federal/state partnership focused on
    protecting human health by helping utilities finance infrastructure to sustainably provide
    safe drinking water to Americans. This report highlights the 10* anniversary of the
    DWSRF, demonstrating accomplishments for not only 2007 but also for the past decade
    that this exceptional program has been in existence.

    Over the past 10 years, the DWSRF program has provided $12.6 billion in assistance to
    5,555 projects that have improved public health protection for millions of Americans.
    Since 1997, 39% of DWSRF assistance has been provided to systems serving fewer than
    10,000 people, and 72% of all assistance agreements have been with these small systems.
    Flexibility, innovation, and forward-thinking are hallmarks of this program, as the
    numerous examples in this report illustrate.

    Through the DWSRF's set-aside provisions, states can support the development and
    implementation of key programs designed to advance the achievement of the Safe
    Drinking Water Act's ambitious public health protection objectives. The DWSRF
    is unique in offering the states this flexibility to tailor a mix of infrastructure and
    programmatic investment that best meets their specific circumstances and priorities.
    Through 2007, the states have invested some $1.4 billion in these set-aside activities.

    Ensuring the long-term sustainability of our nation's drinking water infrastructure is
    a major challenge. The DWSRF offers states many tools to help meet this challenge.
    Building on 10 years of proven success, the DWSRF program is moving forward to help
    ensure sustainable public health protection for 21st century America.

    I welcome this opportunity to share with you the decade of accomplishments that makes
    the DWSRF an important and effective program.

    Benjamin H. Grumbles
    Assistant Administrator
    Office of Water

 For 10 years, the Drinking Water State Revolving Fund (DWSRF) has enabled communities
 throughout the nation to make affordable, long-term investments in sustainable public health
 protection for millions of Americans.
Congress established the DWSRF in  the 1996 Safe
Drinking Water Act (SDWA) Amendments  in order
to  provide states  with  a  financing  mechanism  to
ensure safe drinking water.  The  DWSRF is  designed
to finance investments in infrastructure and to support
the  key  initiatives introduced in the Amendments,
including  ensuring  the  technical,  managerial, and
financial capacity of drinking water systems; achieving
sustainable infrastructure; and preventing drinking water
contamination. Each state program targets the drinking
water systems that have the most significant public health
and financial needs. At the same time, states can direct
resources as they see fit to provide public water systems
(PWSs) with the necessary tools and knowledge to avoid
future public health problems.

Since the  initial $1.2  billion  federal commitment  in
1997,  the DWSRF has grown into  an accessible and
efficient multi-billion-dollar funding source.  In 1997
and 1998, states provided $339 million  in assistance
through 170 agreements. In the 8 years since, states have
provided $12 billion in assistance through nearly 5,200
loan agreements. The fund's summary statement (Exhibit
2), provides an overview of its strong growth.

This annual report documents the DWSRF program's 10
years of remarkable success and rapid growth. The report
details how states and EPA made the DWSRF a:

 • Critical source of funding for public health protection
   for communities most in need (Section 1:  Public
   Health Success).
 • Financially successful and robust lending program
   (Section 2: Financial Success).
 • Key contributor  to the sustainability of the nation's
   drinking water infrastructure (Section 3:  Achieving
   Sustainable Infrastructure).
 • Dynamic program that will evolve to meet the needs
   of drinking water systems and state programs in the
   future (Section 4: Future of the DWSRF).
                For 10 years, the DWSRF has enabled drinking water systems to make
                                 affordable investments in critical infrastructure
> Over $350 million
  distributed in
  federal grants
                         >  Funds available
                            exceed $1 billion
                         >  Percentage of
                            grants reserved for
                            set-asides peaks at
      >  100^ project

      >  Value of binding
         passes $1 billion
1,000^ assistance
agreement signed
For the first time,
annual projects
surpass $1 billion

                                                                                             DWSRF 2007 Annual Report
Exhibit 2: DWSRF National
Fund Activity -
Annual Fund Activity
Federal Capitalization Grants
State Matching Funds
New DWSRF Funds Available for Assistance
Project Commitments (Executed Loan Agreements)
Number of Loans/Projects Financed
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 (Executed Loan Agreements)
Number of Loans/Projects Financed
Set-Aside Funds Available for Assistance
Project Disbursements from the Fund
Cash Draws from Fund
Cash Draws from Set-Asides
Performance Summary
Estimated ($ Millions)





    Source: EPA's DWSRF National Information Management System (DWNIMS)
Finally,  this  report presents  detailed  summary financial
statements for the national  program (Section 5: Financial
DWSRF Program Accomplishments
Since 1997, states  and EPA regions have worked to give
drinking water systems  across  the  country the  financial,
technical,  and managerial means  to provide safe drinking
water for current and future generations. Today, the DWSRF
is  a cornerstone of EPA's efforts  to promote and support
sustainable drinking water infrastructure.
                               In  the past decade, states loaned  $12.6  billion for 5,555
                               projects.  They also targeted significant special assistance to
                               small drinking water systems and disadvantaged communities
                               (which often struggle to meet the health-based  standards
                               of  the SDWA), enabling them to  implement long-term
                               strategies to build and maintain technical, managerial, and
                               financial  capacity. Over the life of the program, 39%  of all
                               DWSRF funds were provided to small drinking water systems
                               (those serving fewer than 10,000 persons). More significantly,
                               72% of all  assistance agreements  have been with these  small
                               drinking  water systems.
>  Annual projects
   funded exceed 600
   for the first time
>  Over $5 billion in
   total funds now
  Total assistance to
   small systems hits
   $2 billion
      > Annual fund
        exceed $1 billion
—^  > 99% of annual
        available funds
^^    loaned for the first
CN    time

      > Over $5  billion
        in projects started
        since 1997
^^  > Investment in the
°    DWSRF exceeds
O    $10 billion
 Principal and
        interest repayments

                                                                pass $1 billion

In addition, 25% of all assistance agreements have been with
disadvantaged communities, to which states often offer a mix
of low-interest (or no-interest) financing, longer repayment
terms, and principal forgiveness.

As the need and demand for DWSRF  funding have grown,
states have developed increasingly innovative ways, including
leveraging, to maximize  and use the available funds. States
have  used set-aside funding to increase the  impact  of the
funds and to sustain day-to-day program operation.

The program's flexibility has also enabled EPA and states to
respond to unexpected contamination outbreaks and natural
disasters and to emerging issues and concerns such as climate
change, water scarcity, and security threats.
  Leveraging Additional Funds

  Twenty states have used their DWSRF capitalization grants
  and repayments  from borrowers to leverage additional
  funds from the bond market.  As a result, these states are
  able to meet even  greater levels of demand for DWSRF
  funding. The decision to leverage is based on the balance
  of the present demand for funds with the costs to the state
  program of repaying leveraged dollars. To date, states have
  leveraged  an additional $3.4 billion for DWSRF-funded
Financial Success and Public Health Success
The DWSRFs  ultimate purpose is  to  finance sustainable,
long-term public health protection. The program's ability to
fund projects that protect public health depends on financial
success  and growth. Since  its  inception,  the  DWSRF  has
achieved significant public health and financial successes. The
fund's value has increased rapidly, and the DWSRF maintains
a reputation  as a sound federal and state investment. This
financial  success  is  particularly  noteworthy  given   the
                                                historically low interest  rates in the  public  and private
                                                financing markets during the past 10 years. Drinking water
                                                systems and communities that take advantage of these loans
                                                should be on solid financial ground in the future because of
                                                the savings provided by the DWSRF.

                                                Financial success has enabled states  to  fulfill the program's
                                                purpose  of ensuring  safe drinking  water for millions of
                                                Americans. Since  1997,  states have awarded $4.9 billion
                                                in loans  to help systems in violation of the SDWA health-
                                                based standards return to compliance. Another $6 billion has
                                                gone to help drinking water systems maintain compliance or
                                                comply with upcoming regulations.
                                                The Future of the DWSRF Program
                                                The 10 years  of rapid,  consistent  growth of the  DWSRF
                                                program is a reflection of its vital importance. The program
                                                will serve as an  even  more important and powerful public
                                                health protection  tool in  the years to come as national
                                                attention to drinking  water quality and quantity grows. As
                                                drinking water systems'  needs and challenges increase and
                                                evolve, the DWSRF will  be poised to respond.
      Small Systems
   Technical Assistance
   set-aside spending
   exceeds $100 million

>  Amount of funds
   available exceeds $10
  Average interest rate
   hits low of 2.15% (2%
   below market rate)
                                               >  Record assistance
                                                  ($1.67 billion) pushes
                                                  cumulative assistance
                                                  past $10 billion
  States sign their 5*000™
   assistance agreement
                                              >  Over 3,500 projects
                                                 now complete

       1997-2007 Highlights
       Funds Available
       Loan Agreements
       Value of Loans
       Fund Disbursements
          stance as % Funds Available  94%
       Set-Aside Spending Rat
ate       73%
       Return on Federal Investment   111%
                                                                               DWSRF 2007 Annual Report
 1.  Public  Health  Success
A safe and secure supply of drinking water is essential to ensuring public and
environmental health in every community. The DWSRF is committed to funding
drinking water infrastructure projects necessary to protect public health. In 10
years, the financial success of the DWSRF programs has ensured the availability of
DWSRF funding to protect public health for millions of Americans  nationwide.
 Washington State Department of

 Has a "Distressed County"designation based
 on unemployment history; an economically
 distressed county is one with a 3-year history of
 unemployment 20% greater than the statewide
   Eyartment of Environmental Quality

   veloped a screening tool that
   Iks the application reviewer
 through a series of indicators to
 assess the capacity of potential borrowers.
                        To achieve this objective, the structure and
                        rules of the DWSRF favor PWSs most in
                        need of assistance:  small,  disadvantaged,
                        and out-of-compliance community water
                        systems  (CWSs). To  identify the  most
                        critical projects, states use priority ranking
                        systems to compile annual project priority
                        lists  (see  text  box).  Every  state  takes
                        advantage of the program's flexibility to
                        tailor its loan assistance to address specific
                        challenges that its drinking water systems
                        face. In addition to loans, DWSRF set-aside
                        funds provide each  state with powerful,
                        flexible tools with which to assist drinking
                        water systems.
                                          Project Priority Lists-
                                          states are required to give
                                          priority to projects that:
                                          1.   Address the  most serious
                                              risks to  public health
                                          2.   Are necessary to ensure that
                                              a PWS can meet the SDWA's
                                              health-based drinking water
                                          3.   Assist the PWSs most in need
                                              on a per-household basis
       lent of Environmental
       it/on; Alaska
                   iciently evaluate DWSRF
                        Millions Protected
                        As the value of the DWSRF has grown, the number of people who have benefitted
                        from DWSRF loans has increased. The number of consumers served each year by
                        systems that received DWSRF assistance increased by more than 300% from 1998
                        to 2007- In 2007 alone, the DWSRF assisted drinking water systems serving 17%
                        of the population served by CWSs (Exhibit 3), which translates conservatively to
                        an estimated 40 million people. In 2007, 99% of total assistance provided went
                        to CWSs. These  systems have the greatest impact on public health, particularly
                        for chronic health threats. Thousands of systems and millions of Americans also
                        have better public health protection as a result of efforts funded through state
                        DWSRF  set-asides.
Awards Recognizing Sustainable Public
The DWSRF biennially recognizes one state in
each region that has an outstanding DWSRF
program and has implemented innovative
practices that have furthered the program's
public health goals.
                                                           Exhibit 3: Annual Percent of Population Served
                                                           by CWSs that Received DWSRF Assistance
                                       1997 1998 1999 2000 2001  2002 2003 2004 2005 2006 2007

Public Health Success
Public Health and Infrastructure
The relationship between public health
and infrastructure needs is complex; the
PWSs that have  the most  numerous and
expensive  infrastructure  needs  are not
necessarily the PWSs that have the  most
pressing public health needs, which  is the
focus of the  DWSRE The percentage of
DWSRF funds that go to CWSs serving
fewer than 10,000 persons (39%) is greater
than the percentage of total need attributable to these small systems (28%), as
identified in  the most recent (2003)  Drinking Water Infrastructure Needs Survey
and Assessment  (DWINSA) (Exhibit 4). This is consistent with the DWSRF's
public health objectives—small PWSs  typically have fewer financing options
and the most difficulty providing safe drinking water  because of deficiencies in
technical, managerial, and financial  capacity.

The projects that receive the majority of DWSRF funding are not fully representative
of the need identified in the 2003 DWINSA. Treatment plants and distribution
pipes  are critical—and  expensive—drinking  water system  components. EPA
estimates that storage, transmission,  and distribution account for 75% of drinking
water system infrastructure needs (Exhibit 5), while treatment plants account for
only 19% of need.  Yet projects to  upgrade central treatment have received as
much DWSRF financing as pipe-related projects.

                            Exhibit 4: Total Needs and Cumulative DWSRF
                            Assistance by System Size
                                       Population <10,000         Population >10,000
                              Estimated 2003-2022 Need from 2003 DWINSA
                              Cumulative DWSRF Assistance
Exhibit 5: Percentage of Need (from 2003 DWINSA) and
DWSRF Assistance ($) by Project Category

  Source    • Storage,Transmission, & Distribution
  Treatment   Purchase, Restructuring, & Other
Region 10 Award Winner: Oregon
Health Services, Department         A
of Human Services; Economic
and Community Development
Department; Department of
Environmental Quality

One of the primary objectives of Oregon's DV
program isaffordability.The state has develop'
a special assistance program for disadvantaged
communities through which borrowers can qualify
for loans at 1% interest for 30 years, with up to
$250,000 of principal forgiveness. Communities
can conduct their own income surveys if they
feel that U.S. Census data do not correctly reflect
their economic situations.The result has been a
remarkable $68 million in additional loans to more
than 40 disadvantaged communities.
                        Federal $133 M
     Administrative (4%)

        $4.4 M

   State Program Mgmt (10%)

        $5.7 M
Small Systems TA (2%)


1452(k) Activities (15%)

    $4.0 M

      1997-2007 Highlights
                                                                                                         DWSRF 2007 Annual Report
      Funds Available
      Loan Agreements
      Value of Loans
      Fund Disbursements
$1,160 M
                   unds Available 88%
      Set-Aside Spending Rate
      Return on Federal Investment   140%
Department of Public Health

Used set-aside funds to issue
loans for PWSs to purchase land
and conservation easements
and implement measures to
protect vulnerable sources from
department of Health;
>flfe Drinking Water
branch; Wastewater
 Corporation using set-aside funds to provide
 .lining courses to more than 100 water system
managers and 300 operators.
Division of Environmental
Protection; Office of Financial
This difference is  due to the DWSRF's design—upgrading treatment facilities
delivers public health protection to all consumers and enables  drinking water
systems to meet new, more stringent  regulations in  the long term. The public
health gains from  rehabilitating distribution systems, though important, are not
as significant  as those realized by upgrading  treatment capability. In addition,
                                             drinking  water   systems   are
                                             more  likely to  be able to  fund
                                             distribution system capital costs
                                             on an annual basis using cash and
                                             available reserves. Investments in
                                             treatment infrastructure  tend to
                                             be more capital intensive over a
                                             short  period of time;  therefore,
                                             drinking water systems often rely
                                             on external sources of funding to
                                             finance  such projects. Many of
                                             these  central treatment projects
                                             would not  have  been possible
                                             without DWSRF  financing.

Targeting Systems Most in Need
Just as each state prioritizes projects according to public health impact, each state
also targets assistance to  the drinking water systems that typically need the most
help to provide safe drinking water: out-of-compliance, small, and disadvantaged
systems.   These systems often  face
a  difficult   dilemma—they   cannot
overcome  their  challenges   without
investing  in  infrastructure,  but they
cannot access financing because  of
the  challenges  they  face.   DWSRF
assistance ensures  that these drinking
water systems are  not overlooked and
that public health  in all communities,
large and small, is  protected.
                                                Out-of-Compliance Systems
                                                To address the most immediate risks
                                                to public health, states  give priority
                                                to CWSs that are out of compliance,
                                                or at risk of being out of compliance,
                                                with federal drinking water standards.
                                                The vast majority of DWSRF loans are
                                                       Talent, Oregon

                                                       The  City  of Talent's  water system
                                                       serves 5,050 persons and was  previ-
                                                       ously using some of the lowest qual-
                                                       ity water sources in the state.The City
                                                       suffered a Cryptosporidiosis outbreak
                                                       in the early 1990s and preventing an-
                                                       other outbreak was a constant chal-
                                                       lenge due to seasonal changes  in raw
                                                       water quality. With a $2 million DWS-
                                                       RF loan, the City abandoned their low
                                                       quality water sources and connected
                                                       to the larger City of Phoenix  water
                                                       system. The  DWSRF loan covered the
                                                       costs of construction and necessary
                                                       infrastructure   upgrades,   ensuring
                                                       that Talent's residents have access to
                                                       safe drinking water.
                                                for projects to help CWSs achieve or
                                                maintain compliance with current and future drinking water rules (Exhibit 6).
                                                In each of the last 3 years, more than 30% of all assistance agreements have been
                                                with drinking water systems that  were out of compliance with drinking water
                                                rules, posing  a significant health risk to their customers. States also can use their
                                                DWSRF programs to provide expedited assistance in case of emergencies.

Public Health Success
Small Drinking Water Systems
Small drinking water systems often lack the economies of scale and the technical,
managerial, and financial capacity that larger systems have to reliably provide safe
drinking water. Consequently, small  PWSs are more likely to violate drinking
water regulations. In 2007 alone,  50,013 drinking water systems serving fewer
than 10,000 persons (33% of all small PWSs) reported at least one health-based
standard, monitoring and reporting, or other violation, while only 1,239 larger
systems (30% of all large PWSs) did  so. In a nation where 97%  of all drinking
water systems serve fewer than 10,000 persons, making sure that these systems have
access to the resources that they need is essential to public health protection. The
DWSRF helps ensure that small drinking water systems do not compromise the
health of their customers because they lack access to affordable capital financing.
                                                                  Region 9 Award Winner: Arizona
                                                                  Water Infrastructure Finance Authority
                                                                  (WIFA)                          I

                                                                  WIFA has formed valuable          ^
                                                                  partnerships that enhance the
                                                                  DWSRF program's ability to reach
                                                                  water systems in need of project financing. WIFA is
                                                                  the lead agency for the Rural Water Infrastructure
                                                                  Committee, an informal partnership of various
                                                                  federal and state agencies, including U.S.
                                                                  Department of Agriculture Rural Development
                                                                  and the North American Development Bank. WIFA
                                                                  provides loans, grants, and technical assistance
                                                                  primarily to small, rural communities. Joining forces
                                                                  with other financing sources has reduced workload
                                                                  and increased local participation. Arizona was the
                                                                  first state to award a DWSRF loan to a tribal nation
                                                                  and continues its efforts to provide assistance to
                                                                  tribes by working with the Intertribal Council of
                                            In every year of the program, more
                                            DWSRF assistance agreements have
                                            been  with  small  drinking  water
                                            systems than  with  large  systems.
                                            Since  2000, the DWSRF program
                                            has provided (on average) more than
                                            400 small  drinking water system
                                            agreements each year, compared to
                                            approximately 150 agreements with
                                            large systems. Most  states also use
                                            set-aside funds to target additional
                                            assistance  to help small drinking
                                            water   systems   access   DWSRF
                                            financing.  For example,  Florida,
                                            Massachusetts,  New  Hampshire,
                                            and California fund circuit riders to
help these systems prepare DWSRF loan applications. Because of these and other
efforts, thousands of small drinking water systems that otherwise would not have
had access to financing have been awarded affordable loans from the DWSRF to
complete critical infrastructure projects.
                                                                                          Federal $108 M
                Exhibit 6: Assistance for Compliance with SDWA
Meet Future Requirements
Maintain Compliance
Achieve Compliance for Systems Out of Compliance
                                                                       Arizona's Cumulative DWSRF Activity
                                                                                       Arizona's Set-Aside Summary
                                                                                          62% Exp
                                                                                                 18% of
                                                                                                  Cumulative Spending
  Administrative (4%)

      $4.7 M

State Program Mgmt (10%)

      $1.9 M


1452(k) Activities (15%)

     $4.6 M

      1997-2007 Highlights
                                                                                                         DWSRF 2007 Annual Report
      Funds Available              $1,000 M
      Loan Agreements
      Value of Loans
      Fund Disbursements
         istance as % Funds Available  85%
      Set-Aside Spending Rate       69%
      Return on Federal Investment   170%
Department of
Environmental Quality;
Department of Natural
Resources and Conservation

Contracted with Montana State University
through a set-aside to create a CD-ROM to
provide training on source water assessment and
Department of Health; North
Dakota Public Finance Authority

Collaborates with the state Rural Water
-ssociationand Rural Community Assistance
Programs to target assistance to small PWSs.
Disadvantage^ Communities

Drinking water systems that serve disadvantaged communities often lack both
access to much-needed infrastructure financing and the resources to adequately
maintain their existing system components. As a result, these PWSs face significant
challenges in complying with long-standing and new  drinking water rules.  In
addition  to  ranking disadvantaged  communities higher  on  project priority
lists, many states provide these communities with a mix of longer repayment
terms, lower interest rates, and principal forgiveness. In the past decade, 1,411
agreements  have  been  signed with disadvantaged communities, totaling $2.2
billion in assistance. Almost 650 of these agreements have repayment terms  in
excess of 20 years. In addition, nearly 600 loans have been provided totaling over
$300 million in principal forgiveness (Exhibit 7).
Set-Asides Expand the Public Health Impact
Each state reserves a portion of its annual capitalization grant to fund programs
in support of safe  drinking water.  These programs extend the impact  of the
                ce agreements going to
               junities have repayment
periods greater than 20 years.
          on of Drinking I
        consolidation efforts
    set-aside funds to increase '
 he number of customers per
 eatment facility while raising revenues and
 educing treatment costs.

   s funds from the 4% set-
  Je to offset operating costs, ensuring that the
program can continue without significant cost
:ncreases to users of the fund.

DWSRF, providing help to drinking
water systems in addition to those
that receive  loans. States  can also
use set-aside  funds to meet systems'
individual   needs.  This   tailored
approach helps states allocate funds
where  they  will  have  the  biggest
impact on public health.
Over  the  past   10  years,  states
have  expended  $963 million  to
implement  a variety  of programs
with the  goal of improving public
health protection. Although in the
past states had set aside more funds
Lyons, Colorado

The Town of Lyons'drinking water sys-
tem  was  unable to  maintain compli-
ance with current standards and regula-
tions. The state determined this system
to be a potential acute health hazard.
To serve the public with safe drinking
water,  Lyons connected to the City of
Longmont, which had recently  con-
structed a new water treatment plant.
With $4.9 million in DWSRF funds, the
systems  consolidated  and improved
the technical, managerial, and financial
capacity for both systems.
than they spent, expenditures of set-
aside  funds have been increasing each year since 2004. The set-aside  funds in
reserve peaked in 2006 at over $350 million, but in 2007 expenditures surpassed
              Exhibit 7: Cumulative Assistance to
              Disadvantaged Communities
                 All Assistance to Disadvantaged Communities
                 Extended Repayment (> 20 Years)
                 Principal Forgiven

Public Health Success
   Voice of Experience: Cynthia Dougherty, Director of EPA's
   Office of Ground Water and Drinking Water

   Cynthia Dougherty has been director of the National Drinking Water Program
   since 1995.

   "It's not often in federal government that you get the opportunity to see a
   program start from the ground up and grow into a true success story. In the
   mid-1990's, a Republican Congress and Democratic Administration looked
   at the success of the Clean Water SRF (CWSRF) program and the challenges
   facing  PWSs. They worked together to create a  new DWSRF program that,
   while based on its older sibling,  brought flexible new provisions to help
   target funds where the needs were greatest and to address disadvantaged
   communities. They allowed states to use some of their money to carry out
   other activities—from  capacity development to  operator  certification  to
   source water protection—that would support strong PWSs for the future.
   Most  states had no preexisting  drinking  water  infrastructure  financing
   program. Over a short time period, they worked through how to structure
   their programs, how to deal with similarities and differences with the CWSRF,
   and how to decide whether and  how much of the set-asides to use. This
   report demonstrates how states have successfully worked through those
   issues and developed thriving programs that will help ensure safe and secure
   drinking  water for the future. It is a program that I am proud of, as I am sure
   are all who have worked in and with it since 1997."
Region 8 Award Winner: Colorado
Water Resources and Power
Development Authority; Water Quality
Control Division; Department of Local
Affairs - Division of Local Government

Colorado strives to provide the funds and support
to help its water systems finance key infrastructure
projects. Colorado aggressively leverages its Fund
and has created a disadvantaged community
program (for communities of 5,000 or fewer
persons) offering up to $2 million in loans at
interest rates as low as 0% over 30 years. CDPHE
has also been a leader in the creative use of the
15% set-aside, using funds to support source
water protection plan development, to create a
Drinking Water Excellence Program to enhance
operational capabilities of water systems, and to
implement a Radionuclide Abatement and Disposal
Strategy focused on assisting small water systems in
disposing of materials containing radionuclides.
                        Federal $126 M
the amount set aside as states implemented targeted, strategic programs to assist
their drinking water systems (Exhibit 8).
There are four DWSRF set-aside categories.  Each has a connection  to public
health, and the programs they fund protect public health from source to tap.
States can reserve funds under each of the four set-asides at their discretion up to
the maximum limit.
Small Systems Technical Assistance (2% Set-Aside)

Up to 2% of a state's capitalization grant can be used to fund programs dedicated
to drinking water systems serving fewer than 10,000 persons. As noted previously,
smaller drinking water systems typically face greater challenges than larger systems;
states use set-aside funds to help small systems  build the capacity they need to

              Exhibit 8: Annual Set-Asides Reserved and Expended
                 Cumulative Remaining Balance
                                                                                        'Colorado's Cumulative DWSRF Activity
                                                                                                et-Aside Summary
                                                                                        63% Expen
                              21% of
                                                                                               Cumulative Spending
     Administrative (4%)

        $3.0 M

   State Program Mgmt (10%)

        $4.0 M
Small Systems TA (2%)

     $1.0 M

1452(k) Activities (15%)

     $8.9 M

      1997-2007 Highlights
                                                                                                 DWSRF 2007 Annual Report
      Funds Available
      Loan Agreements
     Value of Loans
      Fund Disbursements
$952 M
        istance as % Funds Available  97%

      Set-Aside Spending Rate       69%

      Return on Federal Investment   214%

Department of Natural
Resources; Iowa Finance

Developed an easy-to-use Web site to educate
consumers and program users and a loan
calculator showing the savings attributable to
the loan, among other tools.
Department of
comply with current and future drinking water rules and for other purposes. Florida
and Pennsylvania have used this set-aside to contract with technical assistance
providers to perform efficiency audits and provide leak detection services at small
drinking water systems. States have spent almost $14 million from this set-aside
in each of the past 3 years and spent more than reserved in both 2006 and 2007
(Exhibit 9).
                                  Administrative and Technical Assistance
                                   (4% Set-Aside)
                                   States  can  set aside up to 4%  of their
                                   capitalization grants  to  provide  direct
                                   technical  assistance to drinking  water
                                   systems and to administer their DWSRF
                                   programs. Nationally,  states have begun
                                   spending  down  their  reserves over  the
                                   past 2  years to  reach out to  drinking
                                   water systems that need a DWSRF loan
                                   but also  need technical assistance  to
                                   create plans, apply for a loan, and move
                                   forward (Exhibit 10).
                                              Exhibit 9: Small Systems Technical Assistance Set-Aside
                                              Annual Awards and Expenditures
                                                  1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
                                                Awarded  • Expended
                                                                     Exhibit 10: Administrative and Technical Assistance
                                                                     Set-Aside Annual Awards and Expenditures
                                                                         1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
                                                                       Awarded  • Expended

Public Health Success
State Program Management (10% Set-Aside)

The 10% State Program Management set-aside  can be used to fund state Public
Water System Supervision (PWSS) programs, which oversee all drinking water
activities in a state, thus providing improved public health protection to everyone
served by PWSs.  These resources can also be used for source water protection
activities, capacity development initiatives, and operator certification programs,
all of which increase the ability of drinking water systems to provide safe, high-
quality drinking water. For the past  3 years, states  have  spent  more than $43
million annually from this set-aside, more than from any other set-aside (Exhibit
11). States spent more than they reserved for the first time in 2007-

Local Assistance and Other State Programs  (15% Set-Aside)

States can use up  to 15%  of their federal capitalization grant (although no more
than 10%  for any one  activity) to provide loans to acquire land or  conservation
easements  for protection of source waters, provide loans for the implementation
of voluntary, incentive-based source water  quality  protection measures, assist
PWSs as part of a  Capacity Development Strategy, and assist PWSs with wellhead
protection. Since  2004, annual  state spending under this set-aside (often referred
to as the l452(k)  set-aside)  has remained between  $29 million and $35  million
(Exhibit 12). Although states can customize the use of all set-asides, states have
the most flexibility with the 15% Local Assistance set-aside. Delaware used this
set-aside to investigate the  sources and extent of mercury contamination in Sussex
County. Tennessee  used  the set-aside  to study the Memphis Sand Aquifer,  a
ground water source under the direct influence of surface water in the eastern
part of the state.
                             Exhibit 11: State Program Management Set-Aside
                            Annual Awards and Expenditures
                                1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

                               Awarded  •  Expended
   Exhibit 12: Local Assistance and Other State Programs
   Set-Aside Annual Awards and Expenditures
                                              In 1998 and 1999, states took advantage
                                              of a 2-year window to reserve resources
                                              for source water assessments.
      1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

     Awarded  •  Expended
Region 7 Award Winner: Kansas
Department of Health and
Environment (KDHE); Department
of Administration; Development
Finance Authority
KDHE continuously works to maximize assistance
to drinking water systems across the state and to
make the DWSRF program a model of effective
infrastructure financing. KDHE has formed
partnerships with other state agencies to help
streamline the loan process and market the DWSRF
program. Kansas Rural Water Finance Authority
staff review loan applications, allowing KDHE staff
to focus on the environmental issues affecting
communities.The state's Rural Water Association
also provides technical assistance and promotes
the DWSRF program to small drinking water
systems. KDHE has developed a flexible application
process for small water systems. Because these
systems often need to secure funding for an entire
project before they begin planning, KDHE may
enter into loan agreements before engineering
details are finalized.
                         Federal $11OM
      Kansas'Cumulative DWSRF Activity
-Aside Summary
                                                                                                                     9% of
                                                                                                  Cumulative Spending
     Administrative (4%)

         $2.8 M

   State Program Mgmt (10%)

              Small Systems TA (2%)


              1452(k) Activities (15%)

                  $1.5 M

        1997-2007 Highlights
        Funds Available
        Loan Agreements
        Value of Loans
        Fund Disbursements
$1,284 M
          iistance as % Funds Available  78%
        Set-Aside Spending Rate
                                                                                                         DWSRF 2007 Annual Report
        Return on Federal Investment    139%
2.  Financial  Success
The goal of the DWSRF is to protect public health. The DWSRF achieves this
goal by financing sustainable drinking water infrastructure. The program's progress
in protecting public health hinges on the financial success of the DWSRF as a
lending institution. In its first decade, the DWSRF has been an incontrovertible
financial success, meeting or exceeding expectations.
  Department of Health and

  Regularly attends and markets the DWSRF
  at the Louisiana Municipal Association's
  annual convention, the Louisiana Police Jury
  Association's annual convention, and the
  Louisiana Rural Water Annual Training and
  Technical Conference.
   >epartment of Environmental
    \a\ity; Water Resources
  Using set-aside funds, contracts with t
   ural Water Association to conduct at li
  annual small drinking water system site visits to
  'ielp improve system operation, management,
  and compliance rates.
  New Mexico I
                  uthority; Wei
  Helps drinking water systems
  targeted for assistance prepare preliminary
  engineering plans and specifications and
     i K :t environmental reviews.
      r Development Board;
   Environmental Quality (TCEQ)
               This  section  showcases this  strong
               performance from several perspectives,
               including  the  investments  made  by
               Congress and  states into the funds,
               how drinking water systems are eager
               to use and invest these resources, and
               the cycling and growing of resources
               as drinking water systems repay their
               loans. This section  also demonstrates
               the results of the DWSRF's financial
               success, including healthy returns on federal and state investments, a significant
               and growing share of the drinking water infrastructure financing market, and
               fund perpetuity.

               Investments in the DWSRF
               In the past 10 years, the federal government has contributed $8 billion to the
               DWSRF program ($7-2 billion net), and states have invested close to $2 billion
               (through a 20%  match of federal contributions). As shown in Exhibit  13, total
               net federal and state contributions reached $9 billion in 2007- Over  the past
               5 years,  new money channeled into the program has  stabilized between  $800
               million and $850 million per year. EPA expects investments to continue in this
               range for another decade.

               States have accepted and excelled at the role of managing these monies. Nearly every
               state  goes beyond the minimum requirements and conducts a full, independent
               audit of its DWSRF program.  In  addition to  these stringent financial controls,
               states manage efficient operations that keep administrative costs as a percentage
                                                              Exhibit 13: Cumulative Federal and State
                                                              Contributions to the DWSRF
                                                                1997 1998 1999 2000 2001  2002 2003 2004  2005 2006 2007
                                                                Net Federal   • State     Total

Financial Success
of the assistance provided very low. In the past 4 years, states on average have
kept their overhead levels around 2% of the value of the loans provided (Exhibit
14), which is similar to the administrative costs of similar federal loan programs,
including the Clean Water SRF (CWSRF) in its first decade.

DWSRF Investing in Drinking Water Systems
The initial investments into the DWSRF are seed funds from Congress and states
to establish an ongoing program that allows drinking water systems to borrow
money at subsidized interest rates. Unlike grant programs, the DWSRF requires
drinking water systems  (with the exception of some  disadvantaged  systems) to
repay their loans, which promotes full-cost pricing and preserves the federal and
state investment.
 Region 6 Award Winner: Arkansas
 Arkansas Natural Resources
 Commission (ANRC); Department of

 ANRC collaborates with other state
 and federal funding agencies to promptly and
 comprehensively fund water system needs. ANRC
r isa charter member of and active participant in the
 Arkansas Water/Wastewater Advisory Committee,
 composed of state and federal funding and
 regulatory agencies with an interest in or oversight
 of state water and wastewater projects. Through
 participation in project review and coordination
 with other agencies, ANRC has helped to ensure
 funding for as many eligible and viable projects as
 possible to meet state water quality improvement
 goals. ANRC has also worked to maintain demand
 for DWSRF loans, in part by lowering the interest
 rate from 3.25% to 2.75% for a 3-month  period.
 ANRC will need to leverage funds to keep pace
 with the increased demand for DWSRF assistance.
Unlike the interest drinking water systems pay when financing projects through
bonds or commercial borrowing,  the interest paid on DWSRF loans is retained
in the program and made available to other water systems rather than kept as
profit or earnings.  Drinking water systems benefit by saving money when they
                                              borrow from  the DWSRF, and
                                              other  drinking water systems
                                              benefit by being able to borrow
                                              the  repaid federal  and  state
                                              States work closely with drinking
                                              water  systems   to   provide
                                              financing  packages  to  ensure
                                              that utilities receive the funding
                                              they  need on terms  they can
                                              afford.  By putting money into
the hands of a drinking water system, states encourage  public health protection
and start the cycling of resources that will grow and expand the DWSRF. Not
surprisingly, the program developed at a slower pace in  the first 2 years as  states
laid their programs' foundations. In the ensuing years, performance and growth
have been impressive as states have accelerated the pace of assistance.
               Exhibit 14: Ratio of Annual State Administrative
               Costs to Annual Assistance Provided
                   1998 1999 2000 2001 2002  2003 2004  2005 2006 2007
                         Federal $91 M
       rkansas'Cumulative DWSRF Activity
                                                                                     Arkansas' Set-Aside Summary
                                                                                        59% Exp(
                               32% of
                                                                                                 Cumulative Spending
      Administrative (4%)

         $3.7 M

   State Program Mgmt (10%)

         $6.3 M
Small Systems TA (2%)


1452(k) Activities (15%)

    $5.8 M

      1997-2007 Highlights

      Funds Available

      Loan Agreements
                                                                                     DWSRF 2007 Annual Report
      Value of Loans
      Fund Disbursements
          $2,812 M
          $2,303 M
          $2,01 OM
         stance as % Funds Available  82%
      Set-Aside Spending Rat
ate        72%
      Return on Federal Investment   184%
Environmental Protection Agency
Established a program to delineate
recharge areas for CWS wells that
draw from unconfined aquifers.
Department of Environmental
Quality; Municipal Bond Authority
With help from set-aside funds,
 eveloped a statewide program
 ) help water systems manage abandoned wells
 iithin wellhead protection areas.
Encourages the regionalization of
email Hfinking water systems so they may benefit
 epartment of Natural Resources;
 epartment of Administration
wses set-aside funds to contract
with the state Rural Water Association to
hold informal forums for operators to dis'
pertinent issues.
The value of the loans  provided by states  has been increasing along with the
amount of new funds available (Exhibit 15)- Of the nearly $14.5 billion in funds
available, states have already issued $12.6 billion in assistance to drinking water
systems across the country. The federal government has made net investments
of $7 billion in  the DWSRF, and the states and systems have leveraged those
resources to  create an additional $5 billion in assistance—an increase of nearly
60%. Overall, states have provided nearly  90% of the total funds available  to
drinking water systems as direct assistance.
                          States and  EPA have also effectively used set-aside  resources to protect public
                          health. Exhibit 16 shows  the growth in set-asides reserved and expended. States
                          have increased their spending from set-asides each year since 2004, and in 2007
                          they spent down the set-aside reserves they had accumulated. By accelerating the
                          spending of the set-asides, states are putting the funds to their intended  use and
                          thus protecting public health.
                          Awarding loans to drinking water systems is just the first step in moving money
                          through the DWSRE Assistance in the form of a loan essentially becomes a line of
                          credit that systems can draw from as they build the project for which they needed
                          the loan. Drinking water systems are reimbursed as they incur eligible project
                          costs; these payments made by states from the loan funds are called disbursements.

                            Exhibit 15: Cumulative DWSRF Assistance
                            Available and Assistance Provided
                             1997  1998 1999 2000 2001  2002  2003 2004  2005 2006 2007
                            I New Funds Available ••• Assistance Provided
                                                     Exhibit 16: Cumulative Set-Asides Reserved and
                                                                               1997 1998 1999 2000 2001  2002 2003 2004 2005 2006 2007
                                                                              Reserved  ••• Expended

Financial Success
Disbursements represent the actual flow of dollars from state programs to drinking
water systems. By definition, disbursements lag assistance because of the time it
takes to implement an infrastructure project  once a drinking water system has
received a loan. In 2007, states continued to accelerate the pace of disbursements,
decreasing this lag time. States have disbursed over $10 billion of the $12 billion
committed (Exhibit 17).
Project Starts & Completions

Another measure of financial success is the progression of projects from funding
(having  received  a loan) to the  start of construction  to the  completion  of
construction. The  value of completed projects jumped in  2007, and the value
of projects funded and started  has steadily increased since the inception of the
DWSRF program. These trends showcase the success that states are having  in
using the tools and expertise of their mature programs to help drinking water
systems move from receiving a loan to successfully implementing infrastructure
Region 5 Award Winner: Indiana
Indiana Finance Authority (IFA); State    ^
Revolving Loan Fund Program

IFA has greatly improved Indiana's
DWSRF program performance
since its inception in 2005. The       f
state created project summaries that highlight
compliance, economic, and public health benefits
for each loan, which are included in the program's
annual report. These summaries served as an initial
model for the ongoing effort to develop a national
DWSRF benefits report. IFA has used creative
lending approaches to reach out to borrowers who
were unable (due to capacity constraints) to get into
the fundable range on the state's project priority list.
IFA developed a pooled loan program that allows
communities to borrow at the state's AAA borrowing
rate—well belowthe market rate.The IFA issued a
total of six pooled loans in 2006 and 2007 for $52
Recycling Funds

Once borrowers complete their infrastructure projects, they begin principal and
interest payments, which are a driving force for DWSRF growth. These repayments
ensure that affordable financing will be available for other drinking water systems.
The financial success  of the DWSRF is no more evident than when examining the
rate of acceleration of principal and interest repayments as well as other sources of
operating revenue  (such as fees and interest income on fund balances, as shown
in Exhibit 18).

                           Exhibit 17: Cumulative DWSRF Assistance
                           Provided and Disbursements
                            1997 1998 1999 2000  2001 2002  2003 2004 2005
                            I Assistance Provided  • Disbursements
                                                                      2006 2007
   Exhibit 18: Annual Assistance from Recycled
     1997  1998 1999 2000 2001 2002 2003 2004 2005 2006  2007
     Assistance Provided I  Recycled Funds (Principal and Interest
                         Payments and Fee Income)
                                                                                                               Federal $124 M
                         in Indiana's
                                                                                            Indiana's Cumulative DWSRF Activity
                                                                                       Indiana's Set-Aside Summary
                                                                                          63% Expe
                               7% of
                                                                                                  Cumulative Spending
     Administrative (4%)


  State Program Mgmt (10%)

Small Systems TA (2%)


1452(k) Activities (15%)

    $2.2 M

       1997-2007 Highlights
                                                                                                           DWSRF 2007 Annual Report
       Funds Available
       Loan Agreements
      Value of Loans
       Fund Disbursements
$1,528 M
$1,364 M
        Distance as % Funds Available  89%

       Set-Aside Spending Rate       80%

       Return on Federal Investment   141%

Department of Environmental
Used the 2% set-aside to conduct
site visits and hold training sessions, which were
attended by more than 300 water system board

Department of Environmental
Return on Investment
The cycling of money through the DWSRF and the efforts by states to leverage
their funds to maximize resources have yielded impressive returns that have grown
significantly since the inception of the program. A more narrow definition of
return on investment compares outlays (dollars drawn from the federal treasury)
to disbursements (dollars sent from states to drinking water systems). This federal
return on investment has  grown  steadily, as shown in  Exhibit  19-  Congress
                          has  generated  more  than  $10  billion in  actual
                          infrastructure improvements at a cost  of just under
                          $6.5 billion. The annual federal return has increased
                          from around 160% in 2000  to nearly 200% in 2007;
                          the cumulative return has also been increasing since
                          2002 and neared 180% in 2007-
  . : lished a loan program for land acquisition
or conservation easements for sites within a
delineated source water or wellhead protection area
and consistent with approved county water supply
     th Carolina
 Department of Environment and
 ^tural Resources
       i Carolina
       ?nt of Health and Environmental
        "inet and Control Board
Department of Environment and
Conservation; Tennessee Comptroller of the Jreas,
Has the highest set-aside spending rate in Region 4
at 107%.
                                         Rather than compare  dollars  changing  hands,  a
                                         broader measure of return on investment compares
                                         the  loan  assistance for drinking water systems  to
                                         the  federal  contributions to  the loan funds—and
                                         yields even  more  impressive  results.  In  2007,  net
                                         federal contributions continued to hover near $700
               million while the total assistance provided exceeded $1.6 billion. The net federal
               contribution of $7-2 billion has generated more than $12  billion in affordable
               infrastructure investments, a return of more than 200% (Exhibit 20).
                  Exhibit 19: Cumulative Disbursements and
                  Annual Federal Outlays
                   2000  2001   2002  2003   2004   2005  2006   2007
                   I Disbursements    • Federal Outlays
                   • Cumulative Federal Return on Investment ($ to Systems)
                                                                           Exhibit 20: Cumulative Assistance and
                                                                           Cumulative Net Federal Contributions
                                           2000  2001   2002  2003   2004  2005  2006
                                           I Assistance Provided   • Net Federal Contributions
                                           • Assistance Provided as a % of Capitalization Grant

Financial Success
  Region 4 Award Winner: Georgia
  Environmental Facilities Authority (GEFA);  1
  Environmental Protection Division
The net result of this robust increase is shown in Exhibit 21. The growth in annual
assistance is driven by the increase in loan repayments made by early beneficiaries
of the DWSRF. The  portion of total annual assistance that  could come from
water system repayments has increased each year to 45% in 2007- The result of
this recycling of funds is increasing  growth in funds available, with repayments
playing an ever increasing role.
State Return on Investment
The states'  returns  on  investment  (comparing assistance  provided  to state
contributions) have been even more extraordinary.  From an investment of less
than  $2 billion, states have harnessed federal and  recycled resources to create
more than $12 billion in capital improvements (Exhibit 22). States produce $6
in infrastructure assistance for every $1 they put into the DWSRF, if calculated
as a rate of return.
  GEFA targets DWSRF resources to
  the state's many small drinking water
  systems. As of June 2007, the state had provided
  over $26 million in principal forgiveness to 64
  communities, eliminating approximately 1,500
  underperforming or contaminated private wells
  and creating storage facilities for 4.25 million
  gallons of water. GEFA markets its loan programs
  through "GEFA 101 Marketing and Informational
  Seminars," which provide a forum for the local
  government and engineering community to
  discuss program requirements, specific projects,
  and success stories. These seminars have resulted in
  several new projects.
Market Position
In just 10 years, the DWSRF has grown to occupy an important niche in the
drinking water infrastructure financing market. The 2002 Census of Governments
estimated that publicly-owned CWSs borrowed $ 13 billion to invest in drinking
water infrastructure in 1997, the same year the DWSRF was established. Five years
later, municipal drinking water systems borrowed $16 billion for infrastructure,
and the DWSRF accounted for approximately 8% of this borrowing.

                          Exhibit 21: Cumulative DWSRF Revenues
                          from Operations and Repayments
                              1997 1998 1999 2000 2001 2002 2003 2004  2005 2006 2007
                             Interest Payments • Principal Repayments
                             Fee Income          Interest Earnings
   Exhibit 22: Cumulative State Contributions and
   Assistance Provided
   $14  	  700%
     2000   2001   2002  2003   2004   2005  2006
    I  Assistance Provided  • State Contributions
      Assistance Provided as a % of State Contributions
                           Federal $157 M
                                                                                            Georgia's Cumulative DWSRF Activity
                                                                                       Georgia's Set-Aside Summary
                                                                                            76% Expen
                                 24% of
                                                                                                  Cumulative Spending
       Administrative (4%)

           $4.9 M

     State Program Mgmt (10%)

          $12.1 M

     $2.1 M

1452(k) Activities (15%)

     $9.1 M

      1997-2007 Highlights
                                                                                                       DWSRF 2007 Annual Report
      Funds Available
      Loan Agreements
      Value of Loans
      Fund Disbursements
        istance as % Funds Available 91 %
      Set-Aside Spending Rate        75%
      Return on Federal Investment    154%
Health and Social Services; Department
of Natural Resources and Environmental

Using set-asides funds, contracted with a
community college to provide operator
certification training.
Maryland Water Quality Financing
Administration; Water Management
 sed set-aside funds to update the SDWIS data
management system.
There are no  comprehensive data on the market  for drinking water system
financing, but several sources show that the  DWSRF  is  meeting  existing
demand that had not been met through traditional financing sources. The 2000
Community Water System Survey (CWS Survey) estimated that drinking water
systems invest approximately $10 billion per year in capital improvements. The
CWS Survey estimated that DWSRF financing accounts for approximately 5% of
overall capital investment in drinking water infrastructure; systems rely primarily
on current revenue (39%) and borrowing from the private sector (42%). However,
a closer examination of CWS Survey data shows how the DWSRF has filled an
important niche:

  •  17% of publicly-owned CWSs used the DWSRF to finance a portion of their
    capital needs;
  •  11 %  of total capital funds for publicly-owned CWSs came  from the
  •  15% of CWSs serving fewer than  500 persons and 23% of CWSs serving 500
    to 3,300 persons made capital investments through the DWSRF; and
  •  20% of capital improvements for publicly-owned CWSs serving  10,000  or
    fewer persons were financed through the DWSRF.
    (Source: EPA 2000 CWS Survey)

The  DWSRF  has established  itself  as  the  largest  federal financing program
for  drinking water infrastructure. From 2004 to 2006, the  U.S. Department
of Agriculture's Rural Utilities Service (RUS) provided on average about $1.5
billion in loans and grants per year  to 1,200 rural utilities for drinking  water
and wastewater projects. (The DWSRF averaged $1.6 billion for drinking water
projects alone in the same period.) In  addition, the U.S. Department of Housing
and  Urban  Development's Community  Development Block Grant (CDBG)
Program's total disbursements  for water and wastewater in 2003 amounted  to
$479 million.
                                               The DWSRF does not compete with these sources; EPA encourages cooperation
                                               and joint funding of projects to meet the needs of local drinking water systems.
                                               However, the dramatic growth of the DWSRF ensures that it will continue to be
                                               the largest source of federal funding for drinking water systems for the foreseeable
Future Outlook: Growth in Perpetuity
The concerted efforts of EPA, states, and drinking water systems have put the
DWSRF on track for financial success in perpetuity. As principal and interest
payments grow because of the increase in assistance, the number of years needed to
repay the outstanding debt at that year's repayment pace is anticipated to decrease
further and approach 20 years, the most common length for DWSRF loans.

Exhibit 23 forecasts the federal return for additional dollars invested in the fund.
Based on current trends, each additional federal dollar could provide at least $10

Financial Success

                                    of assistance by 2017, which is  consistent
                                    with the growth of the CWSRF in its second

                                    The  projected  increase  in new  funds  for
                                    projects  also  shows  robust  acceleration.
                                    Exhibit  24  projects  the  increase  in  new
                                    funds  available  from approximately $1.6
                                    billion in 2007 to more than $3 billion in
                                    the next decade. This growth is not driven by
                                    increases in contributions from the federal or
                                    state governments; rather, it is a result of the
                                    collective effort of drinking water systems as
                                    they repay their principal and interest.
Region 3 Award Winner: Virginia
Department of Health (VDH), Office of
Drinking Water; Resources Authority

The Virginia DWSRF program has
consistently been a national leader in providing
assistance to small, disadvantaged PWSs. VDH
helps communities gain access to the assistance
they need through partnerships and agreements
with other agencies and organizations throughout
the state. VDH has also developed an innovative
receivership program designed for drinking water
systems lacking managerial and technical capacity,
and has creatively used DWSRF set-asides to help
provide additional technical and financial assistance
to disadvantaged drinking water systems.

The DWSRF's public health benefits are possible because of the strong financial
performance of the DWSRF program. These public health benefits are increasing
due to the states' success in combining the support from the federal and state
governments  with the growing loan repayments to create true revolving funds.
The financial trends of the DWSRF over the past decade are  impressive and
should remain so as the program continues to mature.
  Return on Federal
    Investment in
                         Federal $141 M
in Virginia's
                           Exhibit 23: Future Projection of Federal Multiplier1
                           $35 	$4.5  j?
                                 '99  '01   '03  '05  '07  '09   '11   '13  '15  '17
                             Cumulative Assistance •*•  Federal Multiplier
                             Cumulative Federal Net Contribution
   Exhibit 24: New Funds Available for Projects1
      '97   '99  '01   '03  '05   '07   '09   '11   '13  '15  '17
  • Annual Net Investments   *• Annual New Funds for Projects
  • Annual Repayment of Principal and Interest

7. Modeled projections based on DWSRF Financial Planning Module and additional modeling ofDWNIMS data.
Assumes annual capitalization grant is $842 million through 2018.
     Virginia's Cumulative DWSRF Activity
                                                                                                     it-Aside Summary
                                                                                                                         14% of
                                                                                                     Cumulative Spending
     Administrative (4%)

         $5.0 M

   State Program Mgmt (10%)

         $5.5 M
 Small Systems TA (2%)

     $1.8 M

 1452(k) Activities (15%)

     $5.5 M

      1997-2007 Highlights
                                                                                                   DWSRF 2007 Annual Report
      Funds Available
      Loan Agreements
      Value of Loans
      Fund Disbursements
$2,686 M
$2,435 M
        istance as % Funds Available 91 %
      Set-Aside Spending Rate       91%
      Return on Federal Investment   279%
New Jersey
Department of Environmental Protection;
Environmental Infrastructure Trust

Worked with technical assistance
providers to develop an outreach program that
helps drinking water systems understand the
DWSRF Program's purpose and benefits and
apply for funding.
Department of Health (Departamento  , —
deSalud); Government Development
"ink for Puerto Rico (Banco
 'rubernamental de Fomento para Puerto Rico), Puerto
 •'co Infrastructure Financing Authority (Autoridad
 ara el Financiamiento de la Infraestructura de Puerto
3.  Achieving  Sustainable

Financing America's water infrastructure requires a multi-faceted approach by
public and private stakeholders. For this reason, EPA developed its "four pillars"
strategy for sustainable infrastructure, which focuses efforts on full-cost pricing,
better management, water efficiency, and watershed approaches. In addition to
targeting the most serious public health threats, the DWSRF was founded on and
continues  to support the principles of sustainable infrastructure upheld by these
four pillars.
              Building sustainability is particularly important
              for the changing environment in which drinking
              water  systems  operate.  Since  the  DWSRF's
              inception, regulatory requirements have become
              more numerous and complex, construction and
              energy  costs have  increased  significantly,  and
              the choice of compliance options—particularly
              treatment technologies—has  expanded. At the
              same  time, more  attention  is being  paid  to the
              impact of climate change on the nation's water
              supplies, particularly water scarcity.
                                             The ways in which EPA and states have used the DWSRF to support sustainable
                                             infrastructure have evolved over the past 10 years to address emerging needs while
                                             maintaining the program's core focus on  targeting the most significant public
                                             health threats.
                                             Full-Cost Pricing (Pillar 1)
                                             The full-cost pricing pillar recognizes that the burden of infrastructure investments
                                             is borne primarily by drinking water system customers through the rates they
                                             pay. While difficult to achieve in practice, full-cost pricing offers the advantages
                                             of efficiency and equity in placing the consumer  at the center  not only of
                                             infrastructure financing but also of operations and maintenance.
                                             Nevertheless, full-cost pricing can impose hardships on customers  of smaller
                                             drinking water systems, who bear significantly higher per-household costs than
                                             customers of larger systems. While many larger communities and drinking water
                                             systems can easily obtain  access to private capital markets, small drinking water
                                             systems or  disadvantaged communities have  a much harder time obtaining
                                             affordable long-term financing.
                                             Beyond providing drinking water systems with the means and incentives to invest
                                             in their infrastructure now, states use  DWSRF loans and set-asides to  further
                                             encourage  responsible and forward-thinking financial management. States use

Achieving Sustainable Infrastructure
ranking systems to prioritize loan applicants and can award priority points to loan
applicants that implement full-cost pricing. States also use DWSRF set-asides to
help drinking water systems understand and develop rate structures that allow for
full-cost recovery.
Full-Cost Pricing is Easier with Savings from the DWSRF
For 10 years, the DWSRF has enabled drinking water systems to make affordable
investments in critical infrastructure and simultaneously transition towards full-
cost pricing. DWSRF loans and set-asides can help PWSs implement long-term,
cost-effective solutions to avoid public health problems, rather than resort to short-
term  fixes that will  cost more in the long run. Immediately replacing unreliable
and deteriorating infrastructure  guarantees  stronger  public health protection.
Systems that  invest now will also save money on operations and maintenance
because new equipment is less expensive to maintain and less likely to fail.
Region 2 Award Winner: New York
Department of Health; Environmental       .
Facilities Corporation

The New York DWSRF program
demonstrates innovation through
its use of short-term financing and
loan guarantees.The program has increased its
pace by providing borrowers with 3-year financing,
for which the application process is shorter and
     mplex (enabling borrowers to access money
    quickly). In 2007, New York began offering
loan guarantees, facilitating DWSRF financing for
terms of 30 years. Financial assistance is provided
in the form of an interest subsidy for the first 20
years and as a payment guarantee for all remaining
principal maturities.
States consistently charge below-market interest rates on DWSRF loans (Exhibit
25), which translates into significant estimated savings for drinking water systems.
In 2007, the average  DWSRF interest rate was more than 2% lower than the
municipal rate. With a subsidized interest rate, a drinking water system financing
a $20 million project with a 20-year DWSRF loan would save $9-4 million over
the life of the project.  These savings translate into more affordable water rates for
consumers.  Over the lifetime of the DWSRF, loan recipients have saved  over $3
billion—an average of nearly $300 per household served  by systems receiving
assistance (Exhibit 26).
                            Exhibit 25: Corporate and Municipal Bond vs
                            DWSRF Interest Rates
                            •<- Corporate AAA •*•  Municipal
                            * Corporate BAA •••  Average DWSRF

   Exhibit 26: Estimated Cumulative Savings
   Realized by Financing with DWSRF Loans
   $3.5	  $350
       2000  2001  2002  2003  2004 2005  2006  2007
     Savings •*• Savings per Household
       i i/n Federal
       stment in
                           Federal $540 M
in New York's
     lew York's Cumulative DWSRF Activity
                                                                                       New York's Set-Aside Summary
                                                                                                                      10% of
                                                                                                  Cumulative Spending
     Administrative (4%)

        $20.5 M

   State Program Mgmt (10%)

        $13.9 M
 Small Systems TA (2%)

      $9.8 M

 1452(k) Activities (15%)

      $5.9 M

       1997-2007 Highlights
                                                                                                                DWSRF 2007 Annual Report
       Funds Available
       Loan Agreements
       Value of Loans
       Fund Disbursements
$1,378 M
$1,243 M
         sistance as % Funds Available  90%
       Set-Aside Spending Rate
       Return on Federal Investment    199%
Connecticut                      —•
Department of Public Health; Department
of Environmental Protection; Office of the

Allows drinking water systems to reserve a
portion of their assistance to fund water system
management and source water protection.
department of Human Services; Municipal
land Bank
The Costs of Delay
Drinking   water  systems  that   defer   needed
infrastructure improvements because they do  not
believe they can afford them will only face increased
costs in the future—as well as more  significant
risks to  public health and higher  operation and
maintenance  costs  in  the   immediate  future.
Notably, construction  and building costs have
been rising faster than the rate of inflation since
2003 (Exhibit 27). Between 2003  and 2007,  the
Engineering News-Record (ENR)  Construction
Cost Index (CCI)  and  the Building Cost Index
(BCI) increased by more than 20%. These increases
were due in part  to  growing  demand for raw
materials in Asia, and they are expected to continue
in the long term. Labor costs are also expected to
increase—construction worker wages increased by 20% between 2001 and 2007-
Given these sharp increases, drinking water systems can benefit significantly by
making  infrastructure investments today. Exhibit 28 shows the estimated cost of
delaying a $1 million project based  on average  annual construction cost increases
since 2000. Delaying a project  by only  5 years can result in a near 20% increase
in construction costs.
Water Pollution Abatement Trust;
Division of Municipal Services; Division
of Watershed Management, Drinking
Water Program
                    ntal Services
       •asides to contract with the
 .jmpshire's Forests to help drinking water
systems prioritize projects for land acquisition
and facilitate purchases.
                  Exhibit 27: Increasing Construction and Building
                      1999  2000  2001   2002  2003  2004   2005  2006  2007
                      Construction Cost Index •»• Building Cost Index •*• Inflation
Established a program to provide loans to
municipally owned drinking water systems for
the purchase of land or conservation easements.
                                                                                Exhibit 28: Cost of Delay3
                                                                                     01 2  3  4 5 6  7  8 9 10 11 12 13 14 15 16 17 18 19 3D
                                                                                                    Years Delayed
                                            2. The BCI is built using 68.38 hours of skilled labor of bricklayers, carpenters, and structural ironworkers rates, plus standard
                                            quantities of steel shapes at the mill price, portland cement, and 2x4 lumber. The CCI is built using the same base materials
                                            as the BCI and adding 200 hours of common labor.
                                            3. Net present value of projects delayed by 0-20 years assuming: $ 1 million project cost; increasing construction costs equal to
                                            3.59% per year (average annual % change of CO index from 2000-2006); 20-year loan at 3% interest; and 3% discount rate.

Achieving Sustainable Infrastructure
By using the DWSRF to upgrade their infrastructure immediately, drinking water
systems realize financial savings,  customers benefit from increased  public health
protection and reliability of service as soon as the projects are completed, and the
entire  community may benefit from increased economic growth.  Delays result
in greater  financial costs and public health risks as long as the PWS relies  on
dilapidated infrastructure.
Better Management (Pillar 2)

The better management pillar focuses on the implementation of best management
practices—such as strategic planning, asset  management,  and environmental
management  systems—to  improve drinking water system  sustainability  and
performance and to reduce cost. States ensure that every borrower has adequate
                                     managerial,  technical,   and   financial
                                     capacity; all 5,346 DWSRF loan recipients
                                     so far have met this sustainability threshold
Gushing, Oklahoma
  The Gushing Municipal Authority
  secured   a   low-interest   $4.6
  million DWSRF loan to construct
  a  new  water treatment  plant,
  eight new wells, and an elevated
  water storage tank and to  install
  approximately 42,500  feet  of
  water lines. The  new plant and
  wells  replaced  a  70-year-old,
  non-compliant   surface   water
  system.   These   improvements
  have  brought  Gushing   into
  compliance  with all state and
  federal regulations.
                                   for improved management.
                                   States  may  offer   priority  points  to
                                   applicants that have implemented  asset
                                   management  plans  or  environmental
                                   management systems. States can also use
                                   DWSRF  money  to  identify drinking
                                   water systems  that lack  the  necessary
                                   managerial   capacity   to   consistently
                                   supply safe drinking water and to provide
                                   financial incentives  for them to pursue
                                   regionalization or consolidation with other
                                   systems.  For example, South Carolina
                                     has  offered DWSRF  loans at  reduced
interest rates to encourage viable drinking water systems to  assume ownership
and operation  of non-viable systems. Funding for consolidation has increased
each year since 2005- Since 1997, over $1.1 billion in loans has  been used to
eliminate nearly 750 non-viable drinking water systems through consolidation
(Exhibit 29).
              Exhibit 29: Consolidation and Regionalization
              of Drinking Water Systems
                 Cumulative Systems Eliminated
                 Annual Assistance Provided for Consolidation and Regionalization
                                                                                   Region 1 Award Winner: Rhode Island
                                                                                   Clean Water Finance Agency (CWFA);
                                                                                   Department of Health

                                                                                   Rhode Island has transformed its DWSRF   '
                                                                                   program from a small direct loan program into
                                                                                   a large, aggressively leveraged fund providing
                                                                                   a high level of assistance forthe state'sever-
                                                                                   growing drinking water infrastructure needs.
                                                                                   The Rhode Island CWFA used innovative lending
                                                                                   practices and formed valuable partnerships
                                                                                   to improve public health protection forthe
                                                                                   community of Pawtucket while maintaining
                                                                                   affordable water rates. The CWFA worked with
                                                                                   non-DWSRF loan sources to refinance the
                                                                                   system's $27 million in existing capital debt
                                                                                   with a flexible repayment schedule, allowing
                                                                                   Pawtucket to purchase the system. The CWFA
                                                                                   then leveraged DWSRF funds, enabling the
                                                                                   state to provide over $100 million in loans to
                                                                                   Pawtucket to cover planning and construction
                                                                                   costs. This project is the largest funding package
                                                                                   provided by the state to date.
                                                                                                           Federal $75 M
Rhode Island
                                                                                                          .ve DWSRF Activity
                                                                                     Rhode Island's Set-Aside Summary
                                                                                                                   25% of
                                                                                                Cumulative Spending
                                                                                       Administrative (4%)

                                                                                           '. ;Q_ y

                                                                                     State Program Mgmt (10%)

                                                                                           $5,0 M
                     Small Systems TA (2%)

                         ; ••• oc'

                     1452(k) Activities (15%)

                         $5.3 M

                                                                                                   DWSRF 2007 Annual Report
 States use DWSRF set-aside funds to help drinking water
 system personnel develop critical technical, managerial, and
 financial skills. In 2007 states used the 2%  Small Systems
 Technical Assistance  and  the  15% Local Assistance set-
 asides to strengthen drinking water system management at
 thousands of CWSs (Exhibit 30).
 States have used set-asides to help drinking water systems
 understand the importance  of and  implement  long-term
 management plans, as well as form partnerships with other
 systems, professional and trade organizations, and technical
 assistance  organizations  to share knowledge. States  have
 also used the 10% State Program Management set-aside to
 fund operator  certification activities that ensure drinking
 water system operators are trained in all aspects of system
 operation  and  management and  can respond  to public
 health emergencies.
 Water Efficiency (Pillar 3)

 There has been a notable increase in the recognition of the
 importance of water efficiency since the  inception of the
 DWSRF. In turn,  DWSRF funding has been  critical  in
 strengthening the efficiency pillar. Efficient water use reduces

   Exhibit 30: Annual Percent of CWSs Receiving
   Technical Assistance
    40% -
       1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

      From 2% Set-Aside  • From 15% Set-Aside
drinking water systems' costs and can prolong the useful life
of infrastructure. Perhaps more important, efficient water
use will be critical to ensuring the continued availability of
sufficient quantities of safe drinking water in some areas of
the country.

Having a source of low-cost financing  provides systems
with the opportunity to  consider more efficient treatment
technologies  or other infrastructure upgrades  that  will
ensure more efficient water use in the long-term. DWSRF
loans can be used  to fund installation  of water meters,
installation  or   retrofit  of  water-efficient devices  (e.g.,
appliances and plumbing  fixtures), and installation of a dual
pipe distribution system  as  a means of lowering costs of
treating water to potable  standards. Loans can also be used
  Voice of Experience: Richard Sarver,
  Washington Department of Health

  Richard Sarver was the State of Washington's DWSRF
  Program Manager for 10 years and served as a member of
  the State/EPA SRF Work Group during the first 3 years of the
  DWSRF program.

  "The  DWSRF's  success  comes from  state  flexibility.
  Flexibility  is  provided by  the SDWA and  by  EPA's
  commitment to work closely with states in developing
  program policies and rules. At the outset, EPA established
  the State/EPA SRF Work Group to help identify issues and
  options.  With about 30 state and EPA representatives
  at the table,  discussions  were  often  spirited  and
  always insightful.  State  representatives  worked with
  organizations such as the Association of State Drinking
  Water Administrators to broaden the local perspectives
  they brought to the table.  EPA also solicited input from
  other interested parties, but made sure state program
  administrators had  input  into  policy decisions.   The
  result was recognition of broad diversity among state
  needs and local flexibility to each state to address those
  needs. This led to local creativity and innovation, which
  is often shared with other states. I also give kudos to the
  Council of Infrastructure Financing Authorities for their
  assistance in policy development as well as the training
  and  networking opportunities provided through their
  annual SRF workshops.

  The bottom line is the program is doing exactly what
  it was  intended to  do.  States use the funds to help
  ensure delivery of safe and reliable drinking water to our
  citizens. Loan funds are growing and revolving. As long
  as EPA continues to workclosely with their administrative
  partners, the program should continue to thrive."

Achieving Sustainable Infrastructure
to develop incentive-based efficiency programs (e.g., rebates
and conservation rate structures) as part of a larger project.
Many states,  such as Colorado  and Texas, also require
drinking water systems to have efficiency plans in place as a
prerequisite for receiving DWSRF funding or offer priority
points for such plans.

States  can use DWSRF set-asides to fund water efficiency
initiatives such as leak detection programs,  efficiency audits,
drought  monitoring, conservation rate structures, public
education programs, water efficiency plans, and conservation
ordinances  or regulations.

  After the revised arsenic standard went into effect in
  January  2006,  Indiana  identified  approximately 80
  (primarily very small) drinking water systems that required
  a combined $2.5 million in compliance assistance. In May
  2006, the  state established the Arsenic Remediation
  Grant Program. The Program combines DWSRF set-aside
  funds for treatment facility planning and design costs
  and state monies to cover construction costs.The DWSRF
  Program can  now offer grants up to $100,000 to small
  PWSs. Sixteen applications have been submitted, and
  over $220,000 in grants have been disbursed.
Watershed Approach (Pillar 4)
The watershed pillar promotes the use of watershed-based,
cost-effective alternatives to  traditional  treatment.  For
drinking water systems, the most important aspect of this is
source water protection. The DWSRF played an important
role in ensuring that states  had the resources to conduct
required  source water assessments for all PWSs; in 1997, 42
states took a one-time opportunity to reserve the maximum
set-aside  amount to conduct assessments. Drinking water
systems can build on these source water assessments by using
DWSRF loans to acquire land or conservation easements to
protect drinking water sources.

In  addition, DWSRF set-asides can fund a broad range
of  voluntary,  incentive-based,  and community-oriented
source water protection  activities, including constructing
fences around surface water supplies, capping wells,  and
conducting  public  outreach (e.g., holding workshops on
hazardous waste disposal). States can also  use set-asides to
administer and  provide  technical assistance  through the
state source water protection program.
In total,  nearly $214  million in set-asides have supported
loans for land acquisition  and  conservation easements,
wellhead protection, source water protection area delineation
and assessment, and loans for incentive-based source water
protection  measures.  States  used these set-asides to  meet
source water assessment requirements,  as shown by the
peak in funding in 2002 (Exhibit 31), and continue to use
set-aside  funds  to ensure that  drinking water systems and
communities are actively working to protect watersheds.

Using its 15%  Local  Assistance set-aside, North Carolina
initiated  a  campaign  to educate state and local officials,
businesses and industries, drinking water system staff, and
the general public  about wellhead protection.  The  state
also contracted  with a technical assistance provider to help
communities develop  and implement wellhead protection
plans and conduct inspections and sanitary surveys at ground
water systems.  Pennsylvania used its  10% State Program
Management set-aside to hire an environmental planner to
develop and administer local source water protection grants
and to deliver training to drinking water system and field
Ongoing Importance of the DWSRF
Ensuring  long-term sustainability,  particularly  for small
drinking water systems, will continue to be a challenge.
States have used DWSRF funding to provide drinking water
systems with long-term planning tools and  knowledge to
prepare to respond to  regulatory, financial,  technological,
and environmental changes. The program's built-in flexibility
allows EPA and states to continue to ensure that funding is
used in the most appropriate and effective way to support
the four pillars of sustainable infrastructure in the future.
    Exhibit 31: Annual Source Water and
    Wellhead Protection Program Assistance
      Wellhead Protection
      Technical Assistance
Delineation and Assessment
Loans for Source Water Protection

                                                                                               DWSRF 2007 Annual Report
 4.  Future of the  DWSRF
 Given the remarkable financial success of the DWSRF  and
 its contribution to public health protection nationwide, the
 future of this program is bright. State DWSRF programs have
 carved out a niche within the lending market as a reliable
 source of funding for drinking water infrastructure, especially
 for the systems most in need. Because of rising infrastructure
 needs, complex  new drinking water regulations,  and the
 tightening of credit markets and state and local budgets, the
 demand for DWSRF financing will only increase. Building
 on its foundation of success,  the DWSRF will continue to
 grow and meet the needs of drinking water systems across the
 Increasing Infrastructure Needs
 Drinking water infrastructure needs continue to rise as systems
 nationwide  struggle  to provide safe  drinking water using
 outdated and deteriorated infrastructure. The 2003 DWINSA
 estimated the national infrastructure need at $276.8 billion,
 which is approaching the estimates of the  1995 and 1999
 DWINSAs combined (Exhibit 32).

 Drinking  water   systems  have  continued  to  increase
 infrastructure investments and  the DWSRF continues to
 grow.  However, these investments have not kept pace with
 total  need.  The 2002 Clean Water  and Drinking Water
 Infrastructure Gap  Analysis  identified a  potential  gap
 between needs and spending ranging from $45 billion (under
 a 3% revenue growth scenario) to  $263 billion (under a no
 revenue growth scenario) by 2020. In 2005, the American
 Society of Civil Engineers estimated that the annual drinking
water infrastructure shortfall is at  least $ 11  billion. This
funding gap is expected to continue growing through 2020,
driven primarily by pipe replacement needs as distribution
systems  exceed their useful lives (Exhibit 33). In addition,
many drinking water systems are just now realizing the gap
between their capital needs and available funding as critical
system components deteriorate  beyond repair. DWSRF
funding will be vital in helping drinking water systems keep
pace with their significant infrastructure needs.
Program Changes
As the DWSRF matures, the focus of each state's program
will change to align with the needs of their drinking water
systems. For example, now that state programs are mature,
states are modifying program goals towards the long-
term  needs  of drinking water systems. Many states are
also updating their project priority lists, creating dynamic
      Exhibit 32:20-Year Demand for Funds4
    Exhibit 33: Projected Pipe Replacement Needs5
                                                                 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
      4. EPA's DWINSAs of 1995, 1999, and 2003.
    5. EPA's 2002 Clean Water and Drinking Water Infrastructure Gap

Future of the DWSRF
  Voice of Experience: Don Niehus, EPA Region 3 SRFTeam Leader
  Don Niehus is the Region 3 SRF Team Leader. He has been involved with the DWSRF program since 1996 and is co-author of the first
  draft of the DWSRF Initial Guidance.
  "Looking back over the last 20 years, the SRF programs have evolved to become EPA's biggest programs and have achieved
  widespread respect and support for their environmental and public health accomplishments.
  Congress appropriately gave states the authority to manage the DWSRF program. States have ably risen to the challenge and
  are to be commended for their successes. The EPA regions have assisted the states in successfully implementing the DWSRF
  program through providing technical assistance, sharing "best practices,"and conducting program oversight which identified
  areas for improvement. The regions continue to work with the states on challenges such as expediting fund expenditures and
  encouraging creative and effective use of set-aside funds."
processes that accurately reflect systems' readiness to proceed
and the likelihood to receive funding. States have also increased
overall DWSRF set-aside spending in recent years and will
continue to use set-aside funds to assist drinking water systems
most in need, particularly in light of new regulations.
Future Projections
The value of the DWSRF will continue to increase as drinking
water systems repay interest and principal from loans. EPA
predicts that the  DWSRF's revenues from interest  earnings,
interest  payments on loans, and principal repayments will
grow to $2.4  billion by 2018 and $4.2 billion by 2038, an
increase of almost 400% compared to 2007 (Exhibit 34). As
the DWSRF grows, more funds will be available to finance
critical infrastructure projects. Annual DWSRF disbursements
are predicted to increase 88% over the next 30 years, rising
to $2.6  billion by 2018 and more than $3 billion by 2038
(Exhibit 35).
                                   The DWSRF will continue to grow and meet the needs of
                                                         drinking water systems across the country
     Exhibit 34: Projected Cumulative DWSRF
     Interest and Principal Repayments6
        1997      2007
        Interest Earnings
        Interest Payments
Principal Repayments
                                   Exhibit 35: Projected Annual Project
                                          6. DWSRF Financial Planning Module.

                                                                                               DWSRF 2007 Annual Report
 5.  Financial  Details
 EPA has produced the following joint financial statements
 for the DWSRF program based on data reported by states:
  •  A Statement of Net Assets
  •  A Statement of Revenues, Expenses, and Earnings
  •  A Statement of Cash Flows
 The statements are best thought of as un-audited financial
 reports that provide information on program performance.


 Statement of Net Assets

 The Statement of Net Assets  (Exhibit  38) describes the
 DWSRF's assets and liabilities at the end of Fiscal Year
 (FY) 2007- Assets include both financial and capital assets,
 such as grant funds drawn from the federal treasury, but do
 not  include total grant awards. Liabilities include leveraged
 bonds and match bonds, which account for both current and
 long-term liabilities. The set-aside funds have no liabilities.
 Total assets of the loan funds have increased every year of the
 DWSRF program (cumulative growth in assets is displayed
 in Exhibits 36  and 37).
  •  Total assets of the loan funds were $12.3  billion in
     2007, an  increase of 12.5% over 2006. Outstanding
     loans account for 66% of the program's assets.
  •  State and  federal contributions make up about  90%
     of the $7-8 billion in DWSRF program equity or net
  •  Total assets increased by $1.4 billion from 2006 to

 Statement of Revenue, Expenses, and Net Earnings

 The Statement of Revenue, Expenses,  and Net-Earnings
 (Exhibit  41)  describes  the  operating and  nonoperating
revenues and expenses of the funds at the end of FY 2007-
Operating revenues and expenses include interest from fund
investments and  DWSRF loans and expenses from bond
interest and amortized bond issuance. Nonoperating revenues
and expenses include state and federal contributions.  The
operating revenues and expenditures of the set-aside funds
have remained relatively stable since 2001 (Exhibits 39 and
  • Annual operating revenues  of the loan fund increased
    by $65-7  million from 2006  to  2007, an increase of
    20%; most of this increase was generated by interest on
    fund investments.
  • Annual operating expenses  for 2007 rose $8.8  million
    to $185 million, a 5% increase over 2006.
  • Total revenue of the loan fund exceeded total expenses
    by $1.11 billion in 2007, a 12% increase over 2006 and
    the largest amount by which total revenue has exceeded
    total expenses in the program's history.

Statement of Cash Flows

The Statement of Cash Flows (Exhibit 42) provides a detailed
accounting of cash  flows into and  out of the DWSRF
program. Cash flows into the fund include loan principal
repayments, interest received on loans, and contributions
from states. Flows out of the fund include loan disbursements
to be repaid and bond issuance expense.
  •  For the loan fund, loan disbursements to  be repaid
    totaled $1.6  billion  in 2007,  a  12.9% increase over
  •  Loan  principal  repaid  increased by  $99-7  million
    to  $455-5 million,  an increase of 28% over 2006
  •  Leveraged  bond proceeds  added $403-3 million to
   program cash flow.
     Exhibit 36: Cumulative DWSRF Net Assets
   Exhibit 37: Cumulative Growth of DWSRF Assets
      1997 1998  1999  2000 2001 2002 2003 2004  2005 2006 2007

       Net Assets •  Liabilities
     Cash and Cash Equivalents    Loans Outstanding
     Debt Service Reserve - Leveraged Bonds

Financial Details
Exhibit 38: Statement of Net Assets — Loan Funds

Cash and Cash Equivalents
Debt Service Reserve - Leveraged Bonds
Loans Outstanding
Unamortized Bond Issuance Expenses
Total Assets
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 & Net Assets






6", 687.5
(millions of










                             Statement of Net Assets—Set-Aside Funds (millions of $)

                                                          2007        2006         2005
      Total Assets


      Total Liabilities
Cash and Cash Equivalents
Loans Outstanding





Net Assets
Federal Contributions
Other Net Assets
Total Net Assets
Total Liabilities & Net Assets





        Exhibit 39: Cumulative DWSRF Revenue
            1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
           Loan Interest
           Operating Revenues-
Interest Earnings
Nonoperating Revenues (Expenses)
                                    Exhibit 40:  Cumulative Revenue and Expenses
Operating Revenues
Nonoperating Revenue (Expenses)
Operating Expenses
Net Assets

                                                                                                                       DWSRF 2007 Annual Report
Exhibit 41 : Statement of Revenue, Expenses, and Net Earnings (millions of $)

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
Statement of Revenue, Expenses,

Operating Revenues
Interest on I452(k) Loan Account Investments
Interest on I452(k) Loans
Total Operating Revenues
Operating Expenses
Administrative Expenses Under the 4% Set- Aside
Expenses Under the 2% Set-Aside, Small Systems Technical
Expenses Under the 10% Set- Aside, State Program
Grants made under the I452(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




and Net




















Earnings (millions of $)









0. 05








Financial Details
Exhibit 42: Statement of Cash Flows — Loan Funds (millions of $)

Operating Activities

Loan Disbursements to be Repaid (1,614.6)
Loan Principal Forgiven
Loan Principal Repayments
Interest Received on Loans
Contributions from States
Cash Draws from Federal Capitalization Grants
Total Cash Flows from Operations
Noncapital Financing Activities
Bond Issuance Expense
Interest Paid on Leveraged and State Match Bonds
DWSRF Funds Used for Refunding
Principal Repayment of Leveraged Bonds
Principal Repayment of State Match Bonds
State Match Bond Proceeds
Cash Received from Transfers with CWSRF
Gross Leveraged Bond Proceeds
Total Cash Flows from Non-Capital Financing Activities
Cash Flows from Capital and Related Financing Activities
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
Statement of Cash Flows — Set-Aside

Operating Activities
Federal Contribution
I452(k) Loan Disbursements Made to Borrowers
I452(k) Loan Principal Repayments
Interest Received on I452(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 I452(k) Set-Aside
Total Cash Flows from Operating Activities
Noncapital Financing Activities
Net Cash Provided by Noncapital Financing Activities
Cash Flows from Capital and Related Financing Activities
Investing Activities
Interest Earnings on I452(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








(millions of
























    Assistance Provided to Projects ($ Millions)
                                 Funds Available for Projects ($ Millions)
 Total, by Project Type
    Planning and Design Only
      Transmission & Distribution
    Purchase of Systems
    Land Acquisition
 Total, by Population Served
   Less than 501 Served
   501 to 3,300
   3,301 to 10,000
   10,001 to 100,00
   100,001 and Above
    Loans, by Population Served
    Less than 501 Served
    501 to 3,300
    3,301 to 10,000
    100,001 and Above
Total Funds
Federal Capitalization Grants
State Match
Net Leveraged Bond
Net Loan Principal Repayments
Net Interest Earnings
Net Transfers with CWSRF
Less Set-asides
Other Key Statistics
      - Return on Federal Investmer
       - Average DWSRF Interest Rate in
2007 (vs. Market Rate of 4.2%)
    - States that Leverage
             at Conduct Separate Audits