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PRO"*4-
OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
EPA's Allowing States to Use Bonds
to Meet Revolving Fund Match
Requirements Reduces Funds Available
for Water Projects
Report No. 2007-P-00012
March 29, 2007

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Report Contributors: Melinda Burks
William Dayton
Randy Holthaus
Darren Schorer
Abbreviations
CFR	Code of Federal Regulations
CWA	Clean Water Act
CWSRF	Clean Water State Revolving Fund
DWSRF	Drinking Water State Revolving Fund
EPA	U.S. Environmental Protection Agency
NIMS	National Information Management System
SDWA	Safe Drinking Water Act
SRF	State Revolving Fund
Cover photo: Waterfall (photo courtesy EPA)

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s 	U.S. Environmental Protection Agency	2007-P-00012
March 29, 2007
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Office of Inspector General
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At a Glance
PRO"*^
Why We Did This Review
We conducted this review to
determine how U.S.
Environmental Protection
Agency (EPA) policies have
impacted State revolving
funds (SRFs) and the related
water infrastructure funding
gap. We focused on how EPA
policies allowing States to use
bonds repaid from SRF
interest to meet the match
requirement have affected
funds available.
Background
The Clean Water and Drinking
Water SRFs combined
represent EPA's largest
program. Congress created
the SRFs to provide States
with a continuous source of
funding for needed water
projects. The laws require
States to contribute to the SRF
a match of 20 percent of the
Federal capitalization grant.
In 2002, EPA identified that a
significant funding gap exists
between projected clean water
and drinking water
infrastructure needs and
current levels of Federal,
State, and local spending.
For further information,
contact our Office of
Congressional and Public
Liaison at (202) 566-2391.
To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2007/
20070329-2007-P-00012.pdf
Catalyst for Improving the Environment
EPA's Allowing States to Use Bonds to
Meet Revolving Fund Match Requirements
Reduces Funds Available for Water Projects
What We Found
EPA regulations and policies allowing States to use bonds repaid from SRF
interest to meet SRF match requirements are resulting in fewer dollars being
available for water projects. Twenty States have used the Clean Water SRF to
repay bonds issued to meet the required fund match, and 16 of those States also
did so for the Drinking Water SRF. Many States have issued bonds as general
obligations of the State that could potentially be transferred to the SRFs, which
could also significantly decrease the amount of funds available for future projects.
Further, four States used short-term bonds for their State match and then retired
those bonds from SRF funds within a week of issuing them. We acknowledge
that States have funding limitations and depend on legislatures for funding.
Nonetheless, the majority of States have been able to finance their 20-percent
match without using bonds financed by the SRFs, and we believe this is a goal
toward which all States should strive.
When Congress created the Clean Water and Drinking Water SRF programs, it
intended that they would be ongoing sources of funding for water projects. The
funds were to be used to allow communities to leverage and maximize resources.
The expectation was that the funds would continue to grow into perpetuity.
Current practices have resulted in an estimated $937 million less available for
loans since the inception of the SRF programs. This results in fewer projects
being started and completed, resulting in more systems having public health
concerns.
What We Recommend
We recommend that the Assistant Administrator for Water revise its regulations
and policy on State match options to no longer allow States to use bonds repaid
from the SRF to meet State match requirements.
EPA stated that while it supports the State match policy decisions that were made
at the inception of the programs, it also believes it is appropriate to assess the
impacts under current conditions.

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^tDS%
|	\	UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
|	|	WASHINGTON, D.C. 20460
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^ PRQl^
OFFICE OF
INSPECTOR GENERAL
March 29, 2007
MEMORANDUM
SUBJECT:
EPA's Allowing States to Use Bonds to Meet Revolving Fund Match
Requirements Reduces Funds Available for Water Projects
Report No. 2007-P-00012
FROM:
Melissa M. Heist
Assistant Inspector General for Audit
Vv\
TO:
Benjamin H. Grumbles
Assistant Administrator for Water
This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the
U.S. Environmental Protection Agency (EPA). This report contains findings that describe the
problems the OIG has identified and corrective actions the OIG recommends. This report
represents the opinion of the OIG and does not necessarily represent the final EPA position.
Final determinations on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $402,233.
Action Required
In accordance with EPA Manual 2750, you are required to provide a written response to this
report within 90 calendar days. You should include a corrective actions plan for agreed upon
actions, including milestone dates. We have no objections to the further release of this report to
the public. This report will be available at http://www.epa.gov/oig.
If you or your staff has any questions regarding this report, please contact me at 202-566-0899 or
heist.melissa@epa.gov: or Janet Kasper, Director, Assistance Agreement Audits, at
312-886-3059 or kasper.ianet@epa.gov.

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EPA's Allowing States to Use Bonds to Meet Revolving Fund Match Requirements
Reduces Funds Available for Water Projects
Table of C
Chapters
1	Introduction		1
Purpose		1
Background		1
Scope and Methodology		3
2	EPA's Allowing States to Use Bonds to Meet SRF Match Requirements
Has Reduced Funds Available for Projects		4
Laws Require 20-Percent State Match		4
States Issue Bonds Repaid from SRF Interest for Required State Match		5
SRFs Assuming Repayment of State-Issued General Obligation Bonds		6
States Increasingly Issuing Short-Term Bonds		6
EPA Allows State Match Bonds to Provide States with Flexibility		8
States Believe State Match Bonds Yield Benefits		8
State Match Bonds Result in Less Funding, Higher Costs		9
Fewer Dollars Available Results in Reduced Environmental Benefit		10
Conclusion		11
Recommendation		11
Agency Response and OIG Comments		12
Status of Recommendations and Potential Monetary Benefits		13
Appendices
A	Details on SRF State Match Options		14
B	Details on EPA's Gap Analysis		21
C	Details on Scope, Methodology, and Prior Audit Coverage		22
D	List of States Using Bonds for State Match		25
E	Agency Response		26
F	Distribution		28

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Chapter 1
Introduction
Purpose
In 2002, the U.S. Environmental Protection Agency (EPA) identified that a
significant funding gap exists between projected clean water and drinking water
infrastructure needs and current levels of Federal, State, and local spending. The
primary objective of our audit was to explore how EPA policies have impacted State
revolving funds (SRFs) and the related water infrastructure funding gap. We focused
on how the following EPA policies affected funding available for water projects:
1.	Allowing States to meet the 20-percent State matching requirements by issuing
revenue and general obligation bonds repaid by the SRF.
2.	Allowing State SRFs to assume the liability for repayment of general obligation
bonds, which were originally intended to be paid from State general funds.
3.	Allowing States to issue and repay State match bonds on a short-term basis
(generally within 1 week).
Background
Congress created the Clean Water State Revolving Fund (CWSRF) in 1987 to
provide States with a continuous source of funding to address water quality
projects. Since its inception, the CWSRF has grown to become the largest
Federal funding program for water infrastructure projects across the country.
Similarly, in 1996, Congress created the Drinking Water State Revolving Fund
(DWSRF) to provide States funding to protect human health and support the
sustainability of our Nation's drinking water infrastructure. Combined, the two
SRFs represent EPA's largest single program, accounting for about 50 percent of
all of EPA's assistance award funds. There are 102 SRF programs nationally (all
50 States plus Puerto Rico, each operating a CWSRF and DWSRF).
SRFs Are Intended to Revolve Into Perpetuity
Since 2000, Congress has appropriated, on average, about $2.1 billion annually
for the CWSRF and DWSRF combined - $1.25 billion for the CWSRF and
$838 million for the DWSRF. Both SRFs are capitalized through annual Federal
capitalization grants. States must provide matching funds equal to 20 percent of
the Federal capitalization grants. States loan the SRF funds to communities to
pay for water projects. Principal and interest repayments on the loans are
recycled back into the program to fund additional projects. Congress intended
that the revolving nature of these programs would yield an ongoing funding
source, allowing the SRFs to revolve into perpetuity.
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Notable Achievements
As of June 2005, States had loaned $52.7 billion from the CWSRF for nearly
16,800 projects. These projects were to maintain and improve publicly owned
treatment works, mitigate non-point source pollution, and promote estuary
management. States have provided an average of almost $4.5 billion annually in
assistance to communities through the CWSRF since 2000.
From the DWSRF as of June 2005, States had loaned nearly $9.5 billion for
nearly 4,400 projects. These projects were to ensure the continued provision of
safe drinking water by helping public water systems fund infrastructure upgrades
and by improving the institutional capabilities of those public water systems. The
projects have included treating and distributing drinking water, rehabilitating
wells, developing new sources of water, upgrading storage facilities, and
consolidating water systems. States have provided an average of over $1.3 billion
annually in assistance to communities through the DWSRF since 2000.
EPA Allows States Flexibility for Providing Required State Match
Consistent with the objective of providing States with maximum flexibility in
designing and implementing their SRF programs, EPA allows States to provide
State Match Options Allowed by EPA
1.	State Appropriation
2.	General Obligation Bonds Proceeds
3.	General Obligation Debt Repaid by SRF
4.	General Obligation Bonds Placed in SRF
5.	SRF Match Revenue Bond
6.	Pledged Repayment from State Loans Program
7.	Local Contribution
Source: EPA 832-B-97-003, State Match Options for the
State Revolving Fund Program, February 1997
States deposit into the SRF from State appropriations at least 20 percent of the
Federal capitalization grant, which increases the amount of SRF funds available
for loans to communities for water projects.
States are increasingly using bonds to come up with the funds to meet the match
requirement. The State issues either revenue or general obligation bonds and
deposits the bond proceeds into the SRF as the required State match:
•	A revenue bond is issued by a municipality to fund a specific public
works project and is supported by the revenues of that project.
•	A general obligation bond is secured by the taxing and borrowing power
of the municipality issuing it, rather than the revenue from a given project.
the required 20-percent State
match from a variety of
sources. Seven such options
are shown in the box; details on
each option are in Appendix A.
Most States are using general
fund appropriations or general
obligation bonds repaid with
State general funds as the
source of the required State
match. Under the State general
fund appropriation option, the
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EPA allows the States to use the SRF interest earnings to retire the bonds. The
SRF pays the debt service on the bonds, which consists of bond principal plus
interest payments to retire the bonds.
Significant Water Infrastructure Funding Gap Remains
Our Nation faces several key challenges to ensure that our water bodies are clean
enough to fish and swim in, and that our water is clean enough to drink. Our
current wastewater and drinking systems are aging and nearing the end of their
useful lives. Further, population is increasing. Also, current treatment standards
may not be sufficient. EPA performed a study to gain a better understanding of
these future challenges. The study included determining whether there is a
quantifiable gap between projected clean water and drinking water investment
needs over the 20-year period from 2000 to 2019 and current Federal, State, and
local spending levels.
In its report The Clean Water and Drinking Water Infrastructure Gap Analysis
(Gap Analysis), published in September 2002, EPA noted that a significant
funding gap exists. Depending on the factors and assumptions used to calculate
the 20-year gap, the total gap, including operation and maintenance costs,1 ranges
from:
•	$31 billion to $271 billion for clean water
•	$45 billion to $263 billion for drinking water
Those totals translate into an annual gap of $1.5 billion to $13.5 billion for clean
water needs and $2 billion to $13 billion for drinking water needs. For further
details on EPA's Gap Analysis, see Appendix B.
Scope and Methodology
We performed our audit in accordance with Government Auditing Standards,
issued by the Comptroller General of the United States. We conducted our audit
field work from August to October 2006. We gathered information from EPA
Headquarters and all 10 EPA regions. We collected and analyzed data through
June 30, 2005, related to clean water and drinking water SRFs for all 50 States
and Puerto Rico. See Appendix C for further details on the audit scope and
methodology.
1 Operation and maintenance costs are not eligible for funding under the SRF programs.
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Chapter 2
EPA's Allowing States to Use Bonds to Meet SRF Match
Requirements Has Reduced Funds Available for Projects
EPA regulations and policies allowing States to use bonds to meet SRF match
requirements are resulting in fewer dollars being available for water projects.
Twenty States have used the CWSRF to repay bonds issued to meet the required
SRF fund match. Sixteen of those States also did so for the DWSRF. Many
States have issued bonds as general obligations of the State that could potentially
be transferred to the SRFs and thus decrease fund availability. Four States used
short-term bonds for their State match and then retired the bonds within a week of
issuing them. EPA has allowed these practices to provide States with flexibility.
However, when Congress created the CWSRF and DWSRF programs, it intended
that they would be ongoing sources of funding for water projects. Current
practices have resulted in an estimated $937 million less funds available for loans
since the inception of the SRF programs. This results in fewer projects being
started and completed, resulting in more systems having public health concerns.
We acknowledge that States have funding limitations and depend on legislatures
for funding. Nonetheless, the majority of States have been able to finance their
20-percent match without using bonds financed by the SRFs, and we believe this
is a goal toward which all States should strive.
Laws Require 20-Percent State Match
When Congress established the CWSRF and DWSRF programs in 1987 and
1996, respectively, the purpose was to create a source of funds that would be
available to communities for water infrastructure financing. The revolving nature
of the programs was to ensure the continual growth of the funds and move the
States toward self-sufficiency. The Clean Water Act (CWA) requires States to
develop a priority list of projects based on public health and water quality goals.
The Safe Drinking Water Act (SDWA) also requires that projects be prioritized to
address the most serious risk to human health.
States are required to match the amount that EPA awards them in the
capitalization grants by providing a 20-percent State match. According to the
CWA, "the State will deposit in the fund from State moneys an amount equal to at
least 20 percent of the total amount of all capitalization grants." The CWA
provides for using the Fund "as a source of revenue or security for the payment of
principal and interest on revenue or general obligation bonds issued by the State if
the proceeds of the sale of such bonds will be deposited in the fund." Similarly,
the SDWA requires that "the State deposit in the State loan fund from State
moneys an amount equal to at least 20 percent of the total amount of the grant to
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be made to the State." Further, the law allows using amounts deposited in the
SRF "as a source of reserve and security for leveraged loans."
While the CWA and SDWA allow States to sell bonds and use SRF revenue for
repayment of the bonds, the laws do not specifically address using bonds to meet
the required State match. EPA's CWSRF and DWSRF regulations allow selling
bonds to meet the State match requirement. However, this business practice
decreases the money available to the SRFs, and therefore contributes to the water
infrastructure funding gap. Further, it is contrary to Congress' intent when it
passed the laws that the SRFs continue to grow. Regarding the requirement for
using State moneys for the match, EPA Office of Water has not defined the term
"State moneys."
States Issue Bonds Repaid from SRF Interest for Required State
Match
We identified 20 CWSRF programs2 and 16 DWSRF programs3 that have used
bonds for the required State match and repaid the bonds from SRF funds.
Appendix D provides a listing of these States. Specifically:
•	State CWSRF programs issued approximately $1.1 billion in State match
bonds. States made approximately $865 million in bond principal and
interest payments from the SRF since 1989.
•	State DWSRF programs issued approximately $325 million in State match
bonds. States made approximately $72 million in bond principal and
interest payments from the SRF since 1998.
Using bonds for State match reduces amounts available for loans in future years
because the SRF uses interest earnings of the fund to pay principal and interest on
the bonds. States deposit the bond proceeds in the SRF and use the funds for
loans. However, interest earnings from these loans generally are not sufficient to
cover debt service payments. For example:
2	Wisconsin does not issue bonds for the specific purpose of providing State match for the SRF. The State issues
general obligation bonds for multiple purposes and transfers a portion of the proceeds to the SRF for match. The
State does not record a liability for the bonds issued but it does use SRF revenue to pay debt service on the bonds.
3	Currently, there are 17 DWSRF programs that use State match bonds. Michigan DWSRF started using State
match bonds after June 30, 2005, the timeframe for the scope of our audit.
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Example of How SRF Loans Not Sufficient to Cover Debt
•	Nevada issued $2,665,000 in State match bonds in 2003 and will pay off the entire
principal plus interest of $485,572 from SRF interest revenue over a 10-year period.
•	Although the SRF would earn interest on the loans issued from the bond proceeds,
the interest Nevada earned on loans for 2003 averaged 3.1 percent and the interest
rate on the bonds ranged from 2 to 4 percent.
•	A 10-year loan of $2,665,000 at an interest rate of 3.1 percent would earn about
$475,158 in interest revenue for debt service.
•	The debt service on the remaining principal and interest of $10,414 would come from
interest earned on other SRF loans and investments.
•	As a result, $10,414 would not be available for Nevada to loan out for projects.
Source: EPA OIG review.
SRFs Assuming Repayment of State-Issued General Obligation Bonds
One State CWSRF program (Oregon) has transferred liability of general
obligation bonds from the State to the SRF, and another State (Missouri) plans to
do so. One of the options for State match available to the State is to issue general
obligation bonds and deposit the proceeds into the SRF. The debt incurred from
those general obligation bonds was meant to be paid by State general fund
revenues, not the SRF, and the deposited proceeds were meant to remain in the
SRF as capital for loans. However, since 1989, Oregon has transferred the
liability for about $24 million of general obligation bonds to the CWSRF, and
over $9 million in bond principal and interest has been paid by its CWSRF. Also,
CWSRF programs for 20 States and DWSRF programs for 8 States have issued
general obligation bonds that could potentially be transferred to the SRFs. If EPA
continues to allow this practice, it could significantly increase the liability to the
SRFs and decrease the amounts available for loans.
States Increasingly Issuing Short-Term Bonds
Another method that States use to fund the match is to issue short-term bonds that
are repaid from the SRF generally within 1 week. We identified four CWSRF
programs (Alaska, Louisiana, Michigan, and Oregon) and two DWSRF programs
(Alaska and Louisiana)4 that have done this. Michigan sometimes retired bonds
used for the State match the same day it issued the bonds. Alaska and Oregon
issued bonds for State match and repaid the bonds from SRF revenue the
following day. Louisiana started the practice of using short-term State match
bonds in 1995; the other States started using this practice since 2001. Of the total
bond principal and interest payments from the SRFs since inception of the
programs, the amount of short-term bonds issued and repaid from an SRF (based
on "short-term" being defined as 1 week or less) was approximately $50 million
4 Currently, there are three DWSRF programs that use short-term State match bonds; Michigan DWSRF started
using short-term State match bonds after June 30, 2005, the timeframe for the scope of our audit.
6

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from the CWSRF and $10 million from the DWSRF. These are funds that were
not available for loans to communities.
Although the States technically meet their match obligation under the regulations
when they use short-term State match bonds, in effect, no additional money is
made available to be disbursed to communities for projects. The SRF does save
on interest expense because the amount of interest accruing on the bonds is
minimal, but the amount available for loans is actually reduced because of the
cost of issuing the bonds. Oregon CWSRF plans on issuing $1.8 million for State
match bonds in 2007 that will immediately be repaid from the SRF. Alaska plans
on issuing $1 million in short-term bonds for both the CWSRF and DWSRF in
2007. Table 2-1 uses a hypothetical scenario to compare the amounts available
for loans using general fund appropriations with amounts available using short-
term State match bonds.
Table 2-1: State Match Bond Example
State Match from General Fund Appropriations:
Available for loans prior to issuing bonds at 11/26/06
$10,000,000
State match from general fund
1,000,000
Available for loans at 11/27/06
$11,000,000
State Match from Short-Term Bonds:
Available for loans prior to issuing bonds at 11/26/06
$10,000,000
State match bond issuance on 11/26/06
1,000,000
State match bond repayment on 11/27/06
(1,000,000)
Cost of bond issuance
(20,000)
Available for loans after bond issuance at 11/27/06
$9,980,000
Difference in Amounts Available for Loans
$1,020,000
Source: OIG Analysis of Hypothetical Data
Although the regulations do not stipulate minimum bond repayment terms for
State match bonds, allowing States to retire State match bonds within a week of
issuance is not consistent with the intent of the CWA. The legislative history in
Senate Report 99-50 states:
Subsection (d)(j) of section 603 would allow a State to use the
State Revolving Fund and its chief assets (future revenues fi'om
loan repayments) as a basis for issuing bonds for further revolving
fund activity. Under such an arrangement, a State would be able
to leverage outstanding loans made fi'om an initial set of
capitalization grants, and thus make available significant amounts
of money much sooner than would otherwise have been possible.
The above indicates the intent of bonds is to make money available sooner than
otherwise would have been possible. Leveraging implies taking on significant
debt in addition to the funds provided by the capitalization grant to provide
increased capital for loans. Retiring State match bonds within 1 day, 1 week, or
7

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even 1 year reduces the amount immediately available to communities for water
projects.
EPA Allows State Match Bonds to Provide States with Flexibility
State match bonds for the SRFs provide flexibility to States. The idea of allowing
States flexibility is included in the legislative history. Allowing flexibility to
States is also incorporated into the CWSRF regulations. Title 40, Code of Federal
Regulations (CFR), Section 35.3100(a) states, "The agency intends to implement
the State water pollution control revolving fund program in a manner that
preserves for States a high degree of flexibility for operating their revolving funds
in accordance with each State's unique needs and circumstances." This same
language is included in the DWSRF regulations at 40 CFR §35.3500(c).
According to an EPA report that describes options for meeting the State match,
"In keeping with the objective of providing states with maximum flexibility in
designing SRF programs, the CWA allows states to provide match from a variety
of sources." The report also notes that unfavorable economic conditions may
influence how a State makes its match. CWSRF regulations at 40 CFR
§35.3135(b)(2) state that "Bonds issued by the State for the match may be retired
from the interest earned by the SRF (including interest on SRF loans) if the net
proceeds from the State issued bonds are deposited in the fund." DWSRF
regulations at 40 CFR §35.3550(g)(3) allow States to issue bonds for the match.
The Office of Water believes that States should have maximum flexibility in
implementing the program - the ability to use bonds for State match is one of the
mechanisms providing such flexibility. Office of Water staff stated that the
financial reality is that currently many States have tight State budgets and cannot
afford the match any other way. They stressed that if it were not for the bond
option for providing the required State match, many States would not be able to
make the match, and so eventually would not have an SRF program.
States Believe State Match Bonds Yield Benefits
According to the States that responded to our survey, the two main reasons States
use bonds for State match are: (1) the State legislature is not providing the match
or it is the only option available, and (2) the program could be self-supporting and
thus not dependent on securing State appropriations for the match. For example:
•	Alaska stated the legislature asked the program to find alternative funding
because of significant revenue shortfalls for the State as a whole.
•	Nevada selected bonds to keep the fund self-supporting and not dependent on
State appropriations.
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•	North Dakota stated that bonds were a more reliable source of funds since
appropriations require legislative approval and are not guaranteed to be
renewed every session.
•	Alabama stated that since 1991 the SRF only received partial match for the
CWSRF and no match for the DWSRF, necessitating the issuance of bonds.
According to the survey responses, the two main benefits of using bonds for State
match are: (1) the program does not negatively impact the State's general fund,
and (2) bonds can be issued as needed (without having to wait for the State
budgetary cycle). For example:
•	Ohio stated that if it had to use general revenue funds, the program would be
smaller and slower.
•	Oklahoma stated that assuming other sources were available for State match,
bonds benefit the program by allowing faster access to the capitalization
grants, which maximizes interest earning on the capitalization grants for the
program and gets projects under construction faster.
•	Texas stated that this option provided more flexibility than the 2-year
legislative cycle when an appropriations bill could be considered.
We acknowledge that States have funding limitations and depend on legislatures
for funding. Nonetheless, the majority of States have been able to finance their
20-percent match without using bonds financed by the SRFs, and we believe this
is a goal toward which all States should strive.
State Match Bonds Result in Less Funding, Higher Costs
Since the inception of the SRF programs through June 30, 2005, approximately
$937 million worth of water projects have been unable to be started or completed
because of the practice of States issuing bonds to meet the match requirement and
then using the SRF to repay the bonds. The $937 million includes principal and
interest payments on bonds. Table 2-2 provides data for the States that use bonds
to meet the match requirement for the CWSRF and DWSRF:
Table 2-2: State Match Bonds Issued and Repaid
Fund
No. of
States
State Match
Bonds
Issued
Principal
Repayments
Interest
Payments
Total
Payments
from SRF
CWSRF
20
$1.1 billion
$502 million
$363 million
$865 million
DWSRF
16
$325 million
$40 million
$32 million
$72 million
Total
$1.4 billion
$542 million
$395 million
$937 million
Sources: EPA's National Information Management System; Interest Payment Column Computed
by OIG
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Using bonds repaid from the SRF to fund the State match results in less funds
being available for loans in future years when the SRF pays the debt service on
the bonds. Further, some States essentially do not provide a match because they
issue and retire State match bonds on a short-term basis. The bond proceeds are
deposited into the SRF, but the bonds are repaid from revenue of the SRF within a
week (sometimes the same day).
Many States have issued bonds that are general obligations of the State that could
potentially be transferred to the SRFs. The SRFs could potentially assume the
liability for the unpaid principal and interest payments due on the bonds, which
were originally intended to be paid from State general funds. If EPA allows this
practice, it could significantly increase the liability to the SRFs, and would not
fall within the intent of the laws that the SRFs be a source of continuous funding.
One of the traditional benefits of the SRFs to the communities is the low or zero
interest rate loans for water infrastructure projects. This interest savings provides
communities with easier access to financing to achieve CWA and SDWA goals.
It provides a savings not only to municipalities but, ultimately, to utility
customers. Although not a solution to the funding gap, the SRFs provide a low-
cost alternative especially important to small and disadvantaged communities.
However, EPA's report on State match options (see Appendix A) shows that
using bonds retired from SRF revenue results in the highest cost to both the SRF
and the local communities. This cost results from potentially higher interest rates
on loans because the States have to earn sufficient interest revenue to pay off the
State match bonds. In response to our survey, several States acknowledged that
using State match bonds does have an effect on loan rates charged to
communities. For example:
•	Alabama noted that because the loans are at below market rate, there is a
deficiency that must be made up with either a reserve account or deposit of
cash for subsidy. Without the market rate bonds to repay the program, the
program would be free to charge any interest rate it wishes.
•	Montana includes as part of its loan interest rate a 1-percent surcharge that is
used to pay debt service on State match bonds.
Fewer Dollars Available Results in Reduced Environmental Benefit
Fewer dollars available to the SRFs ultimately results in fewer infrastructure
projects being funded, resulting in decreased or delayed environmental protection.
Reduced funding due to debt service payments on State match bonds impacts the
public health benefits resulting from SRF projects. Congress designed the SRFs
as financial tools to address infrastructure financing needs. The CWSRF funds
projects that will: (1) clean up polluted streams, rivers, lakes, and estuaries;
(2) protect drinking water supplies; (3) preserve recreational waters; and
10

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(4) provide for safer fish and shellfish supplies. The DWSRF funds projects that
ensure that citizens are provided with water that is safe to drink.
Although the SRFs provide infrastructure financing, the funds cannot address all
of the capital infrastructure needs of communities. A significant funding gap
exists between projected infrastructure investment needs and current Federal,
State, and local spending levels. The CWA and SDWA require States to prepare
an Intended Use Plan that identifies amounts available for projects and includes a
priority list of projects for the upcoming year. The plans generally show that
States have a higher demand for SRF funding than is available. For example:
•	Oregon's CWSRF had $55 million available in its fiscal year 2006 but had
$308 million worth of projects on its priority list. Of the 129 projects listed,
Oregon only had funds for the 14 projects ranked the highest.
•	Montana's CWSRF has $27 million available for loans in its fiscal year 2007,
but has an estimated $157 million worth of projects waiting for funding during
the next 2 fiscal years.
•	Nebraska's DWSRF had $10 million available for loans in its fiscal year 2005
but $90 million worth of projects on its priority list.
Conclusion
Congress intended that the CWSRF and DWSRF programs would provide
affordable water infrastructure funding to communities in perpetuity for public
health issues. Congress also required that the States provide part of the funding
through a match to the Federal capitalization grant. EPA's policy has been to
allow flexibility in providing this match by providing several options. Some of
these options involve issuing bonds that are repaid from the revenues of the SRF.
Although the States and EPA believe that bonds repaid from the SRF offer
benefits, using bonds for the required State match reduces the funding available
for water projects. Fewer projects funded could result in more systems having
public health concerns due to delays in obtaining financing.
Recommendation
We recommend that the Assistant Administrator for Water:
2-1 Revise its regulations and policy on State match options to no longer allow
States to use bonds repaid from the SRF to meet State match requirements.
11

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Agency Response and OIG Comments
EPA stated that while it supports the State match policy decisions that were made
at the inception of the programs, it also believes it is appropriate to assess the
impacts under current conditions. At the exit conference, the Director of the
Office of Wastewater Management stated that the Agency plans to conduct a
survey of the States to obtain a better understanding of current practices regarding
State match and the impact changes to the State match policy would have on
program implementation.
In responding to the draft report, the Assistant Administrator for Water stated that
he was concerned that the conclusion that $937 million would be available for
projects if the current policy was changed was speculative. During the exit
conference, the Director of the Office of Wastewater Management further
explained that he did not disagree with how the amount was calculated, but it is
also necessary to consider the impact any change in the regulation may have on
State implementation. There is the potential that State legislatures will not
provide the matching funds, thereby limiting the States' ability to implement the
program.
While a survey of the States may be beneficial to the Agency, we continue to
believe the Agency should revise its regulations and policy on State match options
to no longer allow States to use bonds repaid from the SRF to meet State match
requirements. In responding to the final report, the Agency should include in its
corrective action plan milestone dates for conducting a survey of the States as
well as addressing the report recommendation.
12

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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Action Official
Planned
Completion
Date
2-1 11 Revise its regulations and policy on State match
options to no longer allow States to use bonds
repaid from the SRF to meet State match
requirements.
Assistant Administrator
for Water
Claimed
Amount
Agreed To
Amount
1 0 = recommendation is open with agreed-to corrective actions pending
C = recommendation is closed with all agreed-to actions completed
U = recommendation is undecided with resolution efforts in progress
13

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Appendix A
Details on SRF State Match Options
Discussed below are descriptions of the seven different State match options that EPA has
allowed the States to use for the required 20-percent SRF State match. This information is
described in detail in EPA's SRF State match report, EPA 832-B-97-003, State Match Options
for the State Revolving Fund Program, February 1997.
1. State Appropriation Option
Most States have used general fund appropriations as the source of the required
State match. Under this option, the States deposit into the SRF from State
moneys at least 20 percent of the Federal capitalization grant, which increases the
amount of SRF funds available for loans to communities for water projects.
According to EPA's report, the fact that match deposits are usually cash deposits
under this option provides a benefit to the program because interest earnings on
the match funds remain in the SRF and will be available for loans or other
financial assistance. EPA's report also asserts that States that capitalize their
SRFs through appropriations will be rewarded over time with higher SRF funding
levels. Figure A-l below illustrates the flow of funds under this option:
Figure A-1: State Appropriation Option
U.S. Treasury
(Capitalization
Grants)
Payments
1
State Treasury
(Match)
i
Payments
Repayments


	~
Loans
~


1

Other SRF
1

Assistance




	~
Administrative
Costs
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
14

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2. General Obligation Bond Proceeds Option
Some States issue general obligation bonds and deposit the proceeds into the SRF
for the required State match. The general obligation bonds are backed by the "full
faith and credit" of the State, which repays the general obligation bonds from
future State revenues, such as taxes. Under this option, the SRF funds available
for loans increase by the amount of the general obligation bond proceeds
deposited into the SRF for the State match. EPA's report states that in contrast to
the other bond options, under this approach bonds are not repaid from SRF
interest revenues, so the match funds remain as capital available for eligible
program uses such as loans. Figure A-2 below illustrates the flow of funds under
this option:
Figure A-2: General Obligation Bond Proceeds Option
U.S. Treasury
(Capitalization
Grants)
Payments
1
Repayments
Loans
State
Other SRF
Assistance
1
G.O. Bond
Debt Service ~
Match Payments
(Bond Proceeds)
G.O. Bond
Proceeds
Administrative
Costs
G.O.
Bond Holders
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
15

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3. General Obligation Debt Repaid by SRF Option
Some States issue general obligation bonds and deposit the proceeds into the SRF
for the required State match, but instead of repaying the bonds from State
revenues, the SRF is required to pay the debt service on the bonds. EPA allows
the States to use the SRF interest earnings to retire the bonds. The debt service on
the bonds consists of bond principal plus interest payments to retire the bonds.
Payment of the debt service by the SRF decreases the funds available for loans to
communities for water projects. EPA acknowledged in its report that this option,
along with the SRF Match Revenue Bonds Option (discussed below), carries with
it the highest cost to both the SRF and the local communities. Figure A-3 below
illustrates the flow of funds under this option:
Figure A-3: General Obligation Debt Repaid by SRF Option
U.S. Treasury
Payments
(Capitalization
I
Grants)
i
SRF Interest
Revenues

State


Match Payments
y
T
(Bond Proceeds)
G.O. Bond
Debt Service
G.O. Bond
Proceeds
Hepavmants


	~
Loans
'


1

Other SRF
1

Assistance




-
Administrative
Costs
G.O.
Bond Holders
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
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4. General Obligation Bonds Placed in SRF Option
Another approach available to States is to deposit a general obligation bond into
the SRF and pay the principal and interest into the SRF to retire the bond. The
principal portion of the bond payment to the SRF serves as the required State
match deposit. Since the debt service payments come from State moneys, the
amount of SRF funds available for loans increases by the amount of those
payments. Figure A-4 below illustrates the flow of funds under this option:
Figure A-4: General Obligation Bonds Placed in SRF Option
U.S. Treasury
(Capitalization
Grants)
Payments

4 J
Bonds Placed in SRF ^

*
Repayments


[-~
Loans
r


State
1
Match Payments
(Bond Retirement)
Other SRF
Assistance
Administrative
Costs
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
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5. SRF Match Revenue Bonds Option
Under this option, the State or the SRF issues revenue bonds and deposits the
bond proceeds into the SRF as the required State match. EPA allows the States to
use the SRF interest earnings to retire the bonds. The debt service on the bonds
consists of bond principal plus interest payments to retire the bonds, which is paid
out of the SRF, decreasing the funds available for loans to communities for water
projects. EPA acknowledged in its report that this option, along with the General
Obligation Debt Repaid by SRF Option, carries with it the highest cost to both the
SRF and the local communities. Figure A-5 below illustrates the flow of funds
under this option:
Figure A-5: SRF Match Revenue Bonds Option
U.S. Treasury
(Capitalization
Grants)
PaymentB
1
Repayments
Loans
Net Bond Proceeds
(Match)
Cash Flow
If Bonds
Issued
By State
Bond Proceeds
Other SRF
Assistance
Net
Bond
Proceeds
(Match)
Debt
Service
(SRF Interest
Earnings)
SRF Revenue
Bond Holders
Administrative
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
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6. Pledged Repayments from State Loan Program Option
States may also use loans from other, preexisting State programs as a source of
the required State match. Credit is given for the match as the repayments are
received and deposited into the SRF. Under this option, the amount of SRF funds
available for loans increases by the amount of those repayments into the SRF
from the loan recipients of the other State program. Figure A-6 below illustrates
the flow of funds under this option:
Figure A-6: Pledged Repayments from State Loan Program Option
U.S. Treasury
(Capitalization
Grants)
Payments
1
Repayments
Stats
Loan From
Pre-existing
State Program^
State Loan
Recipient
Loans
Other SRF
Assistance
State Loan
Principal/Repayments
Used As Match
Administrative
Costs
Note: Different rules apply for pre-existing loans made before March 7f 1985,
and after March 7, 1985
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
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7. Local Contribution Option
This approach requires SRF loan recipients to provide an upfront local
contribution equal to 20 percent of the total SRF loan as a condition of securing
the loan. Under this option, the source of the required State match is the local
cash contribution provided to the SRF up front by the communities. These local
contributions increase the amount of SRF funds available for loans. Figure A-7
below illustrates the flow of funds under this option:
Figure A-7: Local Contribution Option
U.S. Treasury
(Capitalization
Grants)
Payments

Repayments
State :
Match
1
Local Contribution
Loans
Recipients
Other SRF
Assistance
Administrative
Costs
Source: EPA 832-B-97-003, State Match Options for the State Revolving Fund Program,
February 1997
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Appendix B
Details on EPA's Gap Analysis
The clean water and drinking water infrastructure gaps represent the difference, or shortfall,
between investment needs and available funding. EPA's Gap Analysis covers a 20-year period
and includes estimates of the funding gap for both clean water and drinking water, and takes into
consideration both capital and operation and maintenance needs. Only capital costs are eligible
to be funded by the SRFs. Data used for the study included EPA's clean water and drinking
water needs surveys, Census Bureau data, and Congressional Budget Office data.
EPA presents the gap as a range under two different revenue scenarios for capital and operation
and maintenance needs. The "no revenue growth" scenario compares the projected need to total
current Federal, State, and local spending levels. Under this scenario, the total 20-year gap for
clean water is $270 billion and $263 billion for drinking water. This translates to an annual
funding gap of $13.5 billion for clean water and $13.15 billion for drinking water (see
Table B-l):
Table B-1: No Revenue Growth Scenario, Years 2000-2019
Type of Costs
20-Year Average Gap
(in billions)
Annual Average Gap
(in billions)
Clean Water
Drinking Water
Clean Water
Drinking Water
Capital
$122
$102
$6.10
$5.10
Operation and
Maintenance
148
161
7.40
8.05
Total
$270
$263
$13.50
$13.15
Source: EPA's Gap Analysis (the last two columns are OIG calculations)
The "revenue growth" scenario assumes total spending will increase by 3 percent per year.
Under this scenario, the total 20-year gap for clean water is $31 billion and $45 billion for
drinking water. This translates to an annual funding gap of $1.55 billion for clean water and
$2.25 billion for drinking water (see Table B-2):
Table B-2: Revenue Growth Scenario, Years 2000-2019
Type of Costs
20-Year Average Gap
(in billions)
Annual Average Gap
(in billions)
Clean Water
Drinking Water
Clean Water
Drinking Water
Capital
$21
$45
$1.05
$2.25
Operation and
Maintenance
10
0
0.50
0
Total
$31
$45
$1.55
$2.25
Source: EPA's Gap Analysis (the last two columns are OIG calculations)
21

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Appendix C
Details on Scope, Methodology,
and Prior Audit Coverage
Scope and Methodology
Our primary audit objective was to explore how EPA policies have impacted State revolving funds
(SRFs) and the related water infrastructure funding gap. Specifically, we looked at the following
EPA policies and practices:
1.	Allowing States to meet the 20-percent State matching requirements by issuing revenue and
general obligation bonds repaid by the SRF.
2.	Allowing State SRFs to assume the liability for repayment of general obligation bonds, which
were originally intended to be repaid from State general funds.
3.	Allowing States to issue and repay State match bonds on a short-term basis (generally within 1
week).
We interviewed EPA regional CWSRF and DWSRF coordinators from regions responsible for
States that issued State match bonds. We also interviewed EPA officials and staff in the Office
of Water's Office of Wastewater Management and Office of Ground Water and Drinking Water.
We identified and determined the:
•	Dollar value of bonds used to meet State match that are repaid from SRF revenue.
•	Bond principal and interest paid from SRF revenue for State match bonds.
•	States that use SRF funds to assume repayment of general obligation bonds originally
intended to be repaid from State general funds (i.e., States that use SRF revenue to repay
bonds originally issued as general obligations of the State's general fund).
•	Dollar value of general obligation bonds for which the SRF has assumed repayment
(i.e., dollar value of bonds repaid from SRF assets that were originally issued as general
obligations of the State's general fund).
•	States that use short-term (repaid within 1 week) SRF revenue bonds for State match.
We gathered data from EPA Office of Water's National Information Management System
(NIMS) for both the CWSRF and DWSRF through June 30, 2005. The data system collects data
from each of the 50 States plus Puerto Rico on annual funding commitments, types of projects
funded, disbursement and repayment of funds allowed under the SRF programs, and financial
activity related to the use of leveraged and State match bonds. EPA collects data from the States
each year and adds that data to the historical series contained in the database from the inception
of the programs.
To determine the dollar value of bonds repaid from SRF revenue, we summarized data from
NIMS. We included data from the inception of the SRF programs through June 30, 2005, in our
analysis. To assess the reliability of the NIMS data and assess the internal controls related to
22

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NIMS, we interviewed EPA staff from the Office of Water and various regions regarding EPA's
procedures for collecting NIMS data from the States and monitoring the quality of data that
States submit. We also compared bond balances as of June 30, 2005, and 2005 bond principal
and interest payments to amounts from State financial statements for the SRF programs. We
contacted EPA regional SRF coordinators and State agency officials, as necessary, to investigate
and resolve any material discrepancies between NIMS and the financial statements.
Most significant differences identified between the amounts reported in NIMS and the State
financial statements occurred because:
•	There were timing differences (NIMS data is reported on a June 30 fiscal year-end basis, and
some States have a different fiscal year end).
•	NIMS is reported on a cash basis and financial statements are reported on an accrual basis.
•	Bond balances from the financial statements are reported as net of unamortized
premiums/discounts and refunding costs, whereas NIMS leveraged bond balances are
reported as gross amounts.
•	Financial statements reflect the refunding of bonds, which is not reported in NIMS.
We calculated a potential overstatement of bond principal repayments for Clean Water NIMS of
approximately 0.8 percent of the total payments. We do not consider the overstatement to be
significant enough to cause a reasonable person, aware of the overstatement, to question our
findings, conclusions, or recommendations. For Drinking Water NIMS, we found three States
had errors in the 2005 reported data for 2005 bond principal and/or interest repaid, but the States
are adjusting the 2005 Drinking Water NIMS data reported in the 2006 submission to reflect the
correct amounts. Further, the cumulative effect of all known errors for Drinking Water NIMS
resulted in bond principal and interest repaid to be underreported in NIMS. Therefore, the
amounts we cite in our audit report to quantify the impact of EPA's State match policies on the
SRFs and the related funding gap are conservative.
We did not note any material weaknesses in internal controls related to NIMS, and concluded
that the NIMS data is sufficiently reliable for the purposes of this audit. We used the NIMS data
to calculate the impact on the SRFs of EPA's policy of allowing States to use bonds for State
match (total State match bond principal and interest paid by the CWSRF and DWSRF since the
inception of the programs through June 30, 2005). Because NIMS provides interest paid for SRF
bonds but does not segregate the interest paid between bonds issued to leverage the fund and
bonds used to provide State match, we had to make some estimates in calculating State match
bond interest paid from SRF revenue. Generally, the interest rates for leveraged bonds and State
match bonds are similar. Therefore, we calculated the interest paid on State match bonds based
on the proportion of State match bonds outstanding to the total bonds outstanding.
To determine the benefits and costs associated with using State match bonds, we surveyed all the
States that use bonds to meet the required match. For CWSRF, 15 of the 20 States that use State
match bonds responded. For DWSRF, 12 of the 16 States that use State match bonds responded.
We also surveyed the States that do not use State match bonds to determine what they see as
barriers to using bonds. For CWSRF, 17 of the 31 States that do not use State match bonds
responded. For DWSRF, 20 of the 35 States that do not use State match bonds responded.
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To determine which States use SRF revenue to repay bonds that were originally issued as general
obligations of the State, we interviewed EPA Office of Water and regional staff. We also
reviewed State annual reports and financial statements. To quantify the amounts of the bond
principal and interest paid, we used data from both the financial statements and NIMS.
To determine which States use short-term SRF revenue bonds, we interviewed EPA Office of
Water and regional staff. We also reviewed documentation provided by the States, such as
annual reports and financial statements. We reviewed financial statements for those States that
repaid State match bonds from either the CWSRF or DWSRF.
We reviewed various State Intended Use Plans for State fiscal years 2005 through 2007 to
determine whether States in general have sufficient SRF funds to meet project demand. To
compare infrastructure needs with available funding, we reviewed the project priority lists
included in the State Intended Use Plans.
We reviewed EPA's Gap Analysis, which is one of several analyses published by various entities
over the last 6 years. Although the various analyses had somewhat different purposes, scope,
and methodologies, the estimates of the funding gap produced by the different studies all seemed
to be comparable and within a reasonable range of each other. EPA's Gap Analysis is one of
three we analyzed that estimated the national funding gap for both clean water and drinking
water needs. In addition, it is one of the most comprehensive studies and resulted in a
conservative estimate of the funding gap relative to the other studies. Therefore, we determined
we could rely on EPA's Gap Analysis for the purposes of this audit.
Prior Audit Coverage
We issued EPA OIG Report No. 2006-1-00021, State of Oregon Clean Water State Revolving
Fund Program Financial Statements for the Year Ended June 30, 2005, dated January 12, 2006.
In that report, we noted that Oregon was using SRF funds to assume repayment of State match
bonds. Oregon was repaying general obligation bonds with SRF assets. We also found during
our audit that Oregon was using short-term bonds for the State match and the State match bonds
were paid off within a very short time period (sometimes within 1 day).
24

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Appendix D
List of States Using Bonds for State Match
Table D-l below shows the States that use bonds for the required State match, including those
States: (1) whose SRFs have assumed repayment of general obligation bonds originally intended
to be repaid from State general funds; and (2) that use short-term State match bonds (repaid
within 1 week):
Table D-1: States Using State Match Bonds, Including General Obligation and Short-Term

Clean Water SRF
Drinking Water SRF
State
State
Match
Bonds
General
Obligation
Bonds
Short-
Term
Bonds
State
Match
Bonds
General
Obligation
Bonds
Short-
Term
Bonds
Alabama
X


X


Alaska
X

X
X

X
Arizona
X


X


Colorado
X





Indiana
X


X


Iowa
X


X


Kansas
X


X


Louisiana
X

X
X

X
Michigan
X

X



Missouri
X
X

X


Montana
X


X


Nebraska
X


X


Nevada
X


X


North Dakota
X


X


Ohio
X


X


Oklahoma
X


X


Oregon
X
X
X



South Dakota
X


X


Texas
X


X


Wisconsin
X





Total
20
2
4
16
0
2
Source: EPA's NIMS; interviews of EPA Headquarters and regional staff; and interviews of State officials.
25

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Appendix E
Agency Response
March 19, 2007
MEMORANDUM
SUBJECT:
Comments on Draft Audit Report:
EPA's Allowing States to Use Bonds to Meet Revolving Fund Match
Requirements Reduces Funds Available for Water Projects
Assignment No. 2006-750
FROM:
Benjamin H. Grumbles
Assistant Administrator
TO:
Janet Kasper
Director for Assistance Agreement Audits
Office of Inspector General
The purpose of this memorandum is to respond to the draft audit report, "EPA's
Allowing States to Use Bonds to Meet Revolving Fund Match Requirements Reduces Funds
Available for Water Projects." As required in the draft report, this response will address the
factual accuracy of the draft report and indicate concurrence or non-concurrence with the
recommendation.
As noted in the draft report, the Clean Water State Revolving Fund Program (CWSRF)
was created in 1987 to provide a continuous source of funding for water quality projects. Since
1987, the program has grown to be the largest environmental infrastructure program in the
country. The CWSRF program has provided over $57 billion in low-interest loans to address
high priority water quality issues, including $5 billion in 2006. The Drinking Water State
Revolving Fund Program (DWSRF) was created in 1996 to provide a continuous source of
funding to protect human health and maintain the Nation's drinking water infrastructure. The
DWSRF program has provided over $11 billion in funding, including nearly $1.7 billion last
year.
In accordance with both the Clean Water Act (CWA) and the Safe Drinking Water Act
(SDWA), States are required to provide a match equal to 20 percent of the total of the States'
capitalization grants. As noted in the report, CWA §603(d)(4) provides for using the CWSRF,
"as a source of revenue or security for the payment of principal and interest on revenue or
general obligation bonds issued by the State if the proceeds of the sale of such bonds will be
deposited in the fund." Similarly, SDWA § 1452(f) (4) allows using amounts deposited in the
DWSRF in the same manner. EPA promulgated regulations for the CWSRF program at 40 CFR
§35.3135(b) (2), stating, "Bonds issued by the State for the match may be retired from the
26

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interest earned by the SRF (including interest on SRF loans) if the net proceeds from the State
issued bonds are deposited in the fund. For the DWSRF program, EPA regulations state, at 40
CFR §35.3550(g) (3), that "A State may issue general obligation or revenue bonds to derive the
State match. The net proceeds from the bonds issued by a State to derive the match must be
deposited into the Fund and the bonds may only be retired using the interest earnings of the
Fund." States have legally used these authorities to issue bonds, to be retired by SRF interest
earnings, for state match, for the past 20 and 10 years, respectively.
The policy decisions made by EPA, 20 years ago for the CWSRF program, and 10 years
ago for the DWSRF program, provided States with the flexibility and capability to launch two of
the Nation's most successful municipal finance programs. These decisions were based on an
analysis of the underlying statutory authority and subsequently codified in the Code of Federal
Regulations. While we support the policy decisions that were made at the time, the Office of
Water also believes it is appropriate to assess the impacts under current conditions. In addition,
we are concerned the draft report's conclusion (that $937 million could have been available for
water quality projects without the State match bond policy) is speculative.
Thank you for allowing me the opportunity to respond to your draft report. If you have
any questions, please contact James A. Hani on, Director, Office of Wastewater Management, at
(202) 564-0748, or Cynthia C. Dougherty, Director, Office of Ground Water and Drinking
Water, at (202) 564-3750.
27

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Distribution
Office of the Administrator
Assistant Administrator, Office of Water (Action Official)
Agency Followup Official (the CFO)
Agency Followup Coordinator
General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Director, Grants Administration Division
Director, Office of Regional Operations
Audit Followup Coordinator, Office of Water
Acting Inspector General
Appendix F
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