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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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