*. U.S. Environmental Protection Agency	12-P-0231

|	\ Office of Inspector General	January25 2012
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At a Glance
Why We Did This Review
The U.S. Environmental
Protection Agency (EPA)
Office of Inspector General
performed this audit as a result
of observations made during an
audit of Special Appropriations
Act Project grants. Based on
that review, we assessed EPA's
policy that allows states to use
revolving fund capitalization
grants to fund local reserve
The Clean Water Act and the
Safe Drinking Water Act
authorize EPA to award grants
to states that have established
Clean Water and Drinking
Water State Revolving Fund
(SRF) programs. States use
these grants to capitalize a
revolving fund from which
low-cost loans and other types
of assistance are provided to
finance infrastructure projects.
EPA Policy on Financing Local Reserves
Needs Revision
What We Found
EPA policy that allows states to use SRF funds to establish local reserve accounts
conflicts with other regulations. Office of Water Policy Memorandum SRF 91-08
says: "These local reserve accounts, which are used to secure loan repayments,
are eligible costs of the SRF/' However, the financing of local reserve accounts
does not represent eligible incurred project costs, a requirement for cash draws
from the federal capitalization grants per the Code of Federal Regulations. When
EPA allows use of funds for local reserves, funding is not available for needed
wastewater and drinking water projects.
What We Recommend
We recommend that the Assistant Administrator for Water rescind guidance
allowing federal funds to be used to finance local reserve accounts. The Agency
stated that it does not believe that any state SRF programs are currently drawing
federal funds to finance local reserves, but would issue a memorandum to the
states with instructions that only non-federal SRF funds may be used to finance
local reserves.
For further information, contact
our Office of Congressional and
Public Affairs at (202) 566-2391.
The full report is at: