[Federal Register Volume 63, Number 214 (Thursday, November 5, 1998)]
[Notices]
[Pages 59844-59868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29450]
[[Page 59843]]
_______________________________________________________________________
Part II
Environmental Protection Agency
_______________________________________________________________________
Final Guidelines for Implementation of the Drinking Water State
Revolving Fund Program; Notice
Federal Register / Vol. 63, No. 214 / Thursday, November 5, 1998 /
Notices
[[Page 59844]]
ENVIRONMENTAL PROTECTION AGENCY
[FRL-6154-7]
Final Guidelines for Implementation of the Drinking Water State
Revolving Fund Program
ACTION: Notice.
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SUMMARY: The Environmental Protection Agency (EPA) has published the
Final Guidelines for the Drinking Water State Revolving Fund (DWSRF)
program. The DWSRF program was established by the Safe Drinking Water
Act (SDWA) Amendments of 1996, which were signed by President Clinton
on August 6, 1996. The SDWA authorizes $9.6 billion for the DWSRF
program and related programs under section 1452 from fiscal year 1994
through fiscal year 2003. For fiscal year 1997, EPA's budget includes
$1.275 billion for these programs. On a national level, the Office of
Water is responsible for implementing the SDWA requirements, including
the DWSRF program and related programs under section 1452. The document
is being published today for the benefit and interest of the general
public.
DATES: The Final Guidelines were distributed to all State agencies with
responsibility for the DWSRF program on February 28, 1997.
ADDRESSES: Copies of the Final Guidelines for implementation of the
DWSRF program are available from the Safe Drinking Water Act Hotline,
telephone (800) 426-4791. Copies are also available from the Office of
Water Resource Center (RC4100), U.S. EPA, 401 M Street, SW, Washington,
DC 20460. The DWSRF Guidelines may also be obtained from the EPA Web
Site at the URL address http://www.epa.gov/OGWDW.
FOR FURTHER INFORMATION CONTACT: The Safe Drinking Water Act Hotline,
telephone (800) 426-4791. For technical inquiries, contact James
Bourne, Drinking Water Implementation and Assistance Division, Office
of Ground Water and Drinking Water, U.S. EPA, (4606), 401 M Street SW,
Washington, DC 20460, telephone (202) 260-5557.
SUPPLEMENTARY INFORMATION: The Drinking Water State Revolving Fund
(DWSRF) program was established as a new section 1452 of the Safe
Drinking Water Act (SDWA), 33 U.S.C. 300j-12, by the SDWA Amendments of
1996, Pub. L. 104-182, which were signed by President Clinton on August
6, 1996. The DWSRF is a State loan program, to be capitalized in large
part by Federal contributions. Loans from the DWSRF must be made to
protect public health and to achieve or maintain SDWA compliance.
States have the flexibility to tailor DWSRF programs to address local
needs as long as the programs meet the minimum Federal requirements in
the law. States must describe how their programs will prioritize use of
DWSRF funds and are required to develop a priority list of projects,
subject to public review.
The SDWA amendments establish a strong emphasis on preventing
contamination through source water protection and enhanced water system
management. The amendments also emphasize the needs of small water
systems. States may use portions of their DWSRF capitalization grants
for programs that work toward attaining some of these goals and are
required to reserve portions of their DWSRF loan funds for small water
systems.
Interim guidance for the DWSRF program was released on October 4,
1996, to allow States to develop DWSRF programs so that capitalization
grants could be awarded as soon as possible. A notice of availability
of the interim guidance was published in the Federal Register on
October 27, 1996, and announced a public comment period which ended on
November 28, 1996. EPA subsequently held a series of public meetings
with stakeholders to provide information about the program and to
review the interim guidance. Comments received during the period of
public comment and from attendees of public meetings were critical in
developing the Final Guidelines for the program. After discussions with
the Office of Management and Budget, the Final Guidelines for the
program were released on February 28, 1997 and made widely available,
including to all States, which are the recipients of capitalization
grants under section 1452. The Guidelines were also made available to
the general public at that time by placement on the Office of Ground
Water and Drinking Water internet site. The Agency is publishing these
guidelines for the benefit and interest of the public at large.
Paperwork Reduction Act
The information requirements for these Guidelines were submitted to
the Office of Management and Budget (OMB) on March 14, 1997. OMB
granted an emergency request for collecting information from State
grant recipients on January 29, 1997 to allow for award of grants
following release of the Final Guidelines. OMB approved the final
requirements for collecting information from State grant recipients on
June 30, 1997 and assigned OMB control number 2040-0185. The
Information Collection Request is valid for a three year period. The
estimated annual burden for EPA Headquarters and Regional review of
applications, oversight of State programs and review of audits is 722
hours per State. The estimated annual burden per State for completing
required capitalization grant applications, biennial reports and state
audits is 3285 hours and the estimated annual burden for applicants to
prepare applications for DWSRF assistance is 80 hours per community.
Dated: October 28, 1998.
Cynthia C. Dougherty,
Director, Office of Ground Water and Drinking Water.
DRINKING WATER STATE REVOLVING FUND PROGRAM GUIDELINES
Contents
Introduction
I. Development of a Capitalization Grant Application/Agreement
A. Items Necessary To Establish a Loan Fund That Complies with
Federal Requirements
1. Assurance that the State has the authority to establish a
Fund and to operate the DWSRF program in accordance with the SDWA
2. Assurance that the State will comply with State statutes and
regulations
3. Assurance that the State has the technical capability to
operate the program
4. Assurance that the State will accept capitalization grant
funds in accordance with a payment schedule
5. Assurance that the State will deposit all capitalization
grant funds in the Fund or Set-Aside Account
6. Assurance that the State will provide an amount at least
equal to 20 percent of the capitalization grant (State match) in the
Fund
7. Assurance that the State will deposit net bond proceeds,
interest earnings, and repayments into the Fund
8. Assurance that the State will match capitalization grant
funds the State uses for 1452(g)(2) set-asides
9. Assurance that the State will use Generally Accepted
Accounting Principles
10. Assurance that the State will have the Fund and set-aside
account audited annually in accordance with Generally Accepted
Government Auditing Standards
11. Assurance that the State will adopt policies and procedures
to assure that borrowers have a dedicated source of revenue for
repayments (or in the case of a privately owned system, demonstrate
that there is adequate security)
12. Assurance that the State will commit and expend funds as
efficiently as possible, and in an expeditious and timely manner
[[Page 59845]]
13. Assurance that funds will be used in accordance with the
Intended Use Plan
14. Assurance that the State will provide EPA with a Biennial
Report
15. Assurance that the State will comply with all Federal cross-
cutting authorities
B. Intended Use Plan
1. Priority list of projects, including description and size of
community
2. Description of criteria and method used for distribution of
funds
3. Description of the financial status of the DWSRF Program
4. Description of the short- and long-term goals of the DWSRF
Program
5. Description of amounts transferred between the DWSRF and the
CWSRF
6. Description of the set-aside activities, and percentage of
funds, that will be funded from the DWSRF capitalization grant,
including DWSRF administrative expenses allowance, PWSS program
support, technical assistance, etc.
7. Description of how a State disadvantaged community program
will define a disadvantaged system and the amount of DWSRF funds
that will be used for this type of loan assistance
C. Capitalization Grant Agreement
D. Operating Agreement
II. Allotment/Use of Funds
A. Allotment/Reallotment/Withholding of Funds
1. Allotment formula
2. Period of availability and reallotment
3. Withholding of funds
a. The Administrator will withhold funds
b. Reallotment of withheld funds
c. Loss of primacy
B. Set-asides From The National Appropriation And Ceilings on
State Allotments
1. National set-asides
a. Indian Tribes/Alaska Native Villages
b. Health effects studies
c. Unregulated contaminant monitoring
d. Small system Technical Assistance
e. Operator training reimbursement
2. Allotment for D.C. and other jurisdictions
3. State set-aside activities
a. DWSRF administrative expenses
b. State program management
c. Small systems technical assistance
d. Local assistance and other State programs
e. Movement of funds between the Fund and set-aside account
after award of capitalization grant
f. Transfer of funds
C. Types of Financial Assistance That the Fund May Provide
1. Loans
a. Repayment of loan
b. Dedicated repayment source
c. Financial security of privately-owned systems
d. Financial, technical, and managerial capability analysis
e. Disadvantaged communities
f. Project funding for small systems
2. Buy or refinance existing debt obligations
3. Guarantee or purchase insurance for local debt obligations
4. A source of revenue or security for payment of Fund debt
obligations
5. Earn interest on Fund accounts
III. Eligible Systems and Projects
A. Eligible Systems
B. Eligible Projects
1. Compliance and public health
2. Loan assistance to systems that meet the definition in
section 1401(4)(B)
3. Land acquisition
4. Planning and design of a drinking water project
5. Restructuring of systems that are in noncompliance or that
lack the technical, managerial and financial capability to maintain
the system
C. Projects not eligible for funding
1. Lack of technical, managerial and financial capability
2. Significant noncompliance
3. Growth
D. Compliance without DWSRF funding
IV. State/Project Level Authorities
A. Cross-cutting Federal Authorities
B. Environmental Reviews
1. Equivalency projects
2. Non-equivalency projects
3. EPA approval and review process
V. Funding Process
A. 20 Percent State Match
B. State Match for the 1452(g)(2) Set-aside
C. Federal Funding Process
1. General
2. Schedule of payments
3. Binding commitments
4. Cash draw
a. Projects
b. Set-asides
VI. Reporting/Review Responsibilities
A. State Responsibilities
1. Biennial Report
2. Annual audit
3. Information management system
B. EPA Responsibilities
1. Annual review of DWSRF program
2. Evaluation
3. Compliance assurance
4. Dispute resolution
VII. Appendices
A. Federal Cross-cutters
B. Criteria for Evaluating a State's Proposed NEPA-like Process
C. Definitions
Acknowledgements
We wish to thank the many individuals who contributed to
development of the Drinking Water State Revolving Fund Program
Guidelines. In particular, we thank those members of the DWSRF Guidance
Advisory Group for their dedication and commitment in the development
of the guidelines under a very tight time schedule. We also wish to
thank those members of the public who contributed comments on the
Interim Guidance.
Introduction
The Safe Drinking Water Act (SDWA) Amendments of 1996 (Pub. L. 104-
182) authorize a Drinking Water State Revolving Fund (DWSRF) to assist
public water systems to finance the costs of infrastructure needed to
achieve or maintain compliance with SDWA requirements and to protect
public health objectives of the Act. Section 1452 authorizes the
Administrator of the U.S. Environmental Protection Agency (EPA) to
award capitalization grants to States, which in turn can provide low
cost loans and other types of assistance to eligible systems.
In addition to authorizing the infrastructure fund, the SDWA
Amendments also establish a strong new emphasis on preventing
contamination problems through source water protection and enhanced
water systems management. That emphasis transforms the previous law
from a largely after-the-fact regulatory oriented program into a
statute that can provide for the sustainable use of water. Central to
this emphasis is the development of State prevention programs,
including source water protection, capacity development and operator
certification. States may use a portion of their capitalization grants
to fund these eligible activities. The success of these activities will
act to safeguard the DWSRF funds that are provided for improving system
compliance and public health protection and help determine whether the
new law's potential as a preventive environmental statute is realized.
The DWSRF program will help ensure that the nation's drinking water
supplies remain safe and affordable, that drinking water systems that
receive funding will be properly operated and maintained, and that
permanent institutions will exist in each State to provide financial
support for drinking water needs for many years to come. Congress has
placed particular emphasis on assisting smaller drinking water systems
and those serving less affluent populations by providing greater
funding flexibility for these systems under the DWSRF, to ensure that
these systems have adequate technical, managerial, and financial
resources to come into or maintain compliance and provide safe water.
Under the SDWA, a State may administer its DWSRF in combination
with other State loan funds, including the wastewater SRF, hereafter
known as the Clean Water State Revolving Fund (CWSRF). Beginning one
year after a DWSRF program receives its first capitalization grant
(Fund portion), a State may transfer up to a third of the amount of its
subsequent DWSRF capitalization grant(s) to its CWSRF or an equivalent
amount from its CWSRF capitalization grant to its DWSRF.
These two provisions linking the DWSRF and the CWSRF signal
Congressional intent to implement and manage the two programs in a
similar
[[Page 59846]]
manner. EPA also intends to administer the two programs in a consistent
manner and to apply the principles developed for the existing CWSRF to
the DWSRF program to the fullest extent possible. Like the CWSRF, the
DWSRF is fundamentally a State program. Each State will have
considerable flexibility to determine the design of its program and to
direct funding toward its most pressing compliance and public health
protection needs. Only minimal Federal requirements will be imposed.
This document provides a comprehensive description of the
guidelines that will apply in the operation of the DWSRF program. In
basic terms, the guidelines explain:
What States must do to receive a DWSRF capitalization
grant,
What States may do with Federal capitalization grant
funds,
What States may do with funds the law intends for
activities other than project construction (set-asides) and
The roles of both the States and EPA in managing and
administering the program.
The sources of these guidelines are the Statute itself, existing
regulations and policies that apply in EPA grant programs, particularly
those that apply in EPA general grant regulations (40 CFR part 31) and
the CWSRF program, and the Administrator's authority to issue
guidelines and regulations under SDWA. EPA will incorporate the
guidelines by reference in each capitalization grant award as a grant
condition. Where a specific statutory or regulatory provision is the
basis for a requirement, that provision is cited. EPA will follow-up
these guidelines with regulations.
The capitalization grants authorized under section 1452 for the
DWSRF program are generally divided between two purposes: part of each
capitalization grant is to be deposited into the DWSRF Fund for
providing loans and other types of assistance for drinking water
infrastructure projects; the other part is to be deposited into a set-
aside account(s) for programs, projects and activities that do not
receive assistance from the Fund. Throughout this document, the entire
program authorized by section 1452 will be referred to as the DWSRF
program, the loan account as the Fund and the account or accounts for
other programs, projects and activities as the set-aside account.
I. Development of a Capitalization Grant Application/Agreement
The capitalization grant agreement process begins when the State
submits a capitalization grant application. A capitalization grant
cannot be awarded until after Federal funds have been appropriated for
the DWSRF under section 1452 and then allotted by EPA. With its
application, the State must also submit an Intended Use Plan (IUP),
documentation on the institutional framework of its DWSRF program, and
a proposed schedule for capitalization grant payments by the EPA.
In addition to the Fund, a State may use part of the capitalization
grant to encourage the development of source water protection and State
prevention programs and to enhance water systems management. All DWSRF
funds will be awarded through the capitalization grant process. Before
applying for a capitalization grant, a State must prepare an IUP that
identifies how it intends to distribute the grant among the set-aside
account(s) and the Fund and includes the list of projects expected to
be funded.
A State may, however, prepare this IUP in two parts. The first part
would present the State's overall framework for allocation of the grant
among the set-asides and the Fund, but need not include the project
priority list. The second part would be the IUP for the Fund only. This
two-part process will allow a State to proceed with a partial
capitalization grant application (e.g., a set-aside) before it
completes all of the activities required to obtain a full
capitalization grant.
The State must seek meaningful public review and comment on its
funding decisions in the IUP. If a State applies for the project funds
and set-aside funds separately, the State must seek public review on
each separate component of the IUP.
In addition to identifying the distribution of funds, the
capitalization grant application outlines the State's planned DWSRF
program activities, provides assurances and specific proposals for
meeting requirements of the SDWA and Federal general grant regulations,
and serves as the basis for negotiations between the Regional
Administrator (RA) and the State on the proposed payment schedule. The
IUP and the payment schedule are then incorporated into the
capitalization grant agreement, which also defines the State program
and operating methods. Material in these documents that does not change
from year-to-year may be incorporated by reference in subsequent grant
agreements or in an operating agreement (OA), which remains in effect
unless the RA and the State agree to amend it.
For DWSRF program grant applications, States must submit EPA's
standard application for non-construction grant assistance (EPA Form
SF-424). States should submit grant applications no later than ninety
days prior to the end of the period of funds availability. By so doing,
EPA has adequate time to properly review the application and, as
necessary, request additional information from the State. States that
submit applications after this date run the risk of losing funds due to
the provisions governing reallotment.
EPA Headquarters will concur on one State capitalization grant
award in each Region and retains the flexibility to review additional
capitalization grant applications. Headquarters may also review
applications of States with more complex funding programs (e.g.
leveraging). EPA Headquarters will work with the Regions to determine
which State(s) will be reviewed.
A. Items Necessary To Establish a Loan Fund That Complies With Federal
Requirements
The State must provide assurances in the capitalization grant
application on how it will comply with the fifteen specifications
discussed below for all DWSRF program funding (some apply only to the
Fund). In some cases, the State must simply agree or certify in the
grant application that it will comply with the specifications. In other
cases, documentation on the procedures by which the State plans to
ensure compliance with the specifications must be furnished. The State
must include this documentation with its capitalization grant
application or the Operating Agreement (OA) (see Table 1).
1. Assurance That the State Has the Authority To Establish a Fund and
To Operate the DWSRF Program In Accordance With the SDWA
The State must establish a Fund and comply with section 1452 before
it can receive a capitalization grant award (section 1452(a)(1)(B)).
With each capitalization grant application, the State's Attorney
General (AG), or someone designated by the AG, must sign or concur in a
certification that the authority establishing the DWSRF program and the
powers it confers are consistent with State law and that the State may
legally bind itself to the terms of the capitalization grant agreement.
The AG must also provide written assurance that the DWSRF program will
be administered by an instrumentality of the State that is authorized
to (1) enter into capitalization grant agreements with the EPA, (2)
accept capitalization grant awards made under section 1452(a)(1)(A) of
the SDWA and (3) otherwise manage the Fund in
[[Page 59847]]
accordance with the requirements and the objectives of the SDWA.
Documentation supporting the AG's certification, such as copies of
statutes, executive orders, or administrative orders, must be furnished
with the application or reference must be made to documentation
submitted with previous DWSRF capitalization grant applications. Where
waiting for this certification would significantly delay awarding the
first capitalization grant, the head or chief legal officer of the
State agency primarily responsible for administering the DWSRF program
may sign or concur in the certification at the time of the grant award.
In this case the capitalization grant agreement will contain the
condition requiring the State to submit the AG's or designee's
concurrence within 120 days of the grant award. If the AG opinion is
not received within the 120-day period, EPA will not process further
payments until the certification is received.
If more than one State Agency is involved in the DWSRF program, the
roles and responsibilities of each agency must be described in the
application, and a copy of any Memoranda of Understanding or
interagency agreement(s) that describes the roles and responsibilities
between agencies, must be included with the application. However, the
agency that is awarded the capitalization grant must remain accountable
for the use of the funds provided in the grant agreement under EPA's
general grant regulations (40 CFR 31.3).
A State may (as a convenience and to avoid unnecessary
administrative costs) combine, in accordance with State law, the
financial administration of the Fund with the financial administration
of any other revolving fund established by the State if otherwise not
prohibited by the law under which the Fund was established and if the
State certifies that:
(A) All monies in the Fund, including capitalization grants, State
match, bond proceeds, loan repayments and interest, must be separately
accounted for and used solely for the purposes specified in section
1452(a); and
(B) The authority to establish assistance priorities and carry out
oversight and related activities (other than financial administration)
with respect to assistance remains with the State agency having primary
responsibility for administration of the State's public water supply
supervision program (primacy agency), after consultation with other
appropriate State agencies (section 1452(g)(1)).
If a State is eligible to receive a capitalization grant but does
not have primacy, the Governor shall determine which State agency will
have the authority to establish priorities for financial assistance
from the State loan fund (section 1452(g)(1)(B)). Evidence of the
Governor's determination must be furnished with the application.
2. Assurance That the State Will Comply With State Statutes and
Regulations
The State must agree to comply with all State statutes and
regulations that are applicable to DWSRF funds, including Federal
capitalization grant funds, State match, interest earnings, bond
proceeds and repayments, and funds used for set-aside account
activities.
3. Assurance That the State Has the Technical Capability To Operate the
Program
The State must provide documentation demonstrating that it has
adequate personnel and resources to establish and manage the DWSRF
program (for example, current and future staffing plan, background/
qualifications statements, schedule for planned training).
4. Assurance That the State Will Accept Capitalization Grant Funds in
Accordance With a Payment Schedule
The State must agree to accept Federal grant payments in accordance
with the negotiated payment schedule and use those payments for the
activities of the DWSRF program under section 1452. As part of its
capitalization grant application, the State must submit a proposed
schedule of grant payments that is consistent with its proposed binding
commitments outlined in its IUP, and its plan for expending set-aside
funds. The payment schedule will become part of the capitalization
grant agreement. The State will receive Federal funds in accordance
with the provisions of the EPA-Automated Clearing House (formerly known
as Letter-of-Credit). (See V.C. below)
5. Assurance That the State Will Deposit All Capitalization Grant Funds
in the Fund or Set-Aside Account
The State must agree to deposit the capitalization grant in the
Fund except for those portions of the grant that the State intends to
use for set-aside purposes authorized under the SDWA (section
1452(a)(1)(B)). The State must maintain an identifiable and separate
account(s) for the portion, or portions, of the capitalization grant to
be used for set-aside activities (see II.B.3. below).
Once funds are deposited into the Fund, such monies may be used
only as authorized under section 1452(f). Under some circumstances,
funds may be moved after the award of the capitalization grant among
authorized activities (see II.B).
6. Assurance That the State Will Provide an Amount at Least Equal to 20
Percent of the Capitalization Grant (State Match) in the Fund
The State must agree to provide an amount into the Fund equaling at
least 20 percent of the amount of each capitalization grant. Except for
Federal payments made from Fiscal Year (FY) 1997 appropriations, the
State match must be deposited into the Fund on or before the date that
each Federal capitalization grant payment is made to the State (section
1452(e)). States have until September 30, 1999 to provide the State
match for grant payments already received from FY 1997 appropriations.
(See V.A. for additional details.)
The State may provide its match in a form that is similar to the
form of the Federal payment. For example, the Federal payment is made
in the form of an increase to the level of funds available to the State
through the Automated Clearing House (ACH). The State may establish a
similar mechanism to provide its match.
7. Assurance That the State Will Deposit Net Bond Proceeds, Interest
Earnings, and Repayments Into the Fund
The State must agree to credit net bond proceeds, interest earnings
and repayments into the Fund. Fund assets may be used as a source of
revenue or security for bonds, as long as the net proceeds of the sale
of bonds will be deposited into the Fund (section 1452(f)(4)).
Loans for land acquisition and source water protection, made
pursuant to section 1452(k)(1)(A) must be repaid. A State may deposit
these repayments, including principal and interest, in the Fund, or the
State may choose to deposit the repayments into a separate account
dedicated to 1452(k)(1) activities. This separate account is subject to
the same management oversight requirements as the Fund.
8. Assurance That the State Will Match Capitalization Grant Funds the
State Uses for 1452(g)(2) Set-Asides
The State may use up to 10% of its capitalization grant for
1452(g)(2) activities. The State must match use of these funds with an
equivalent amount of state expenditures or provide documentation of in-
kind services. A State cannot use any of the 20% match required under
section 1452(e) to also match the 10% set-aside.
[[Page 59848]]
9. Assurance That the State Will Use Generally Accepted Accounting
Principles
The State must agree to establish fiscal controls and accounting
systems, according to Generally Accepted Accounting Principles (GAAP)
as promulgated by the Governmental Accounting Standards Board, that are
sufficient to account for and report DWSRF Program activities. The
accounting system used for the DWSRF Program must allow for proper
measurement of (1) revenues earned by the DWSRF Program and other
receipts, including, but not limited to, loan repayments,
capitalization grants, interest earnings, State match deposits and bond
proceeds; (2) expenses incurred by the DWSRF Program and other
disbursements, including but not limited to, loan disbursements,
repayment of DWSRF bonds, and other expenditures allowed under section
1452; (3) the assets, liabilities and capital contributions in the
DWSRF Program; (4) the maintenance of the corpus of the Federal and
State capital contributions made to the DWSRF Program; and (5) the
DWSRF's performance in relation to its short- and long-term goals as
identified in the previous IUP.
10. Assurance That the State Will Have the Fund and Set-Aside Account
Audited Annually in Accordance With Generally Accepted Government
Auditing Standards
The State must agree to conduct an annual audit (with separate
opinion for project funds) on the Fund and set-aside account activities
funded in the DWSRF program. The contents of the annual audit are
discussed in more detail under Part VI of these guidelines.
The State DWSRF program shall provide an audit on an annual basis.
Such audits shall be conducted in accordance with Generally Accepted
Government Auditing Standards (GAGAS) issued by the Comptroller General
of the United States.
The Administrator is relying on the annual audit of the DWSRF
program to minimize the risk of waste, fraud and abuse and increase the
chance that such occurrences will be detected and reported. As called
for under GAGAS, audits should be designed to provide reasonable
assurance of detecting material misstatements resulting from
noncompliance with applicable laws, regulations, contracts and grant
agreements and which have a direct and material effect on the
determination of financial statement amounts and be developed in
accordance with State audit practices established in State law. If
specific information comes to the auditor's attention that provides
evidence concerning the existence of possible noncompliance, auditors
should apply procedures specifically directed to ascertaining whether
noncompliance has occurred.
11. Assurance That the State Will Adopt Policies and Procedures to
Assure That Borrowers Have a Dedicated Source of Revenue for Repayments
(Or in the Case of a Privately Owned System, Demonstrate That There is
Adequate Security)
The State must adopt policies and procedures to assure that
borrowers have a dedicated source of revenue for the repayment of loans
and must apply these policies and procedures to the portion of the loan
that must be repaid. States must submit and receive EPA approval for
the policies prior to the award of the first project loan. States must
develop criteria to evaluate an applicant's financial ability to repay
the loan, in addition to paying for operation and maintenance costs and
other necessary expenses.
12. Assurance That the State Will Commit and Expend Funds as
Efficiently as Possible, and in an Expeditious and Timely Manner
The State must agree to commit and expend all funds allotted under
Section 1452 ``as efficiently as possible'' (section 1452(g)(3)), and
in a timely and expeditious manner. The State must enter into binding
commitments with recipients of Fund assistance equal to the total
amount of each grant payment and required State match deposited in the
Fund within one year of the grant payment. States need to work with
loan recipients to make sure that projects are funded and completed in
a timely and expeditious manner. ( See V.C.3. for additional details.)
13. Assurance That funds Will Be Used in Accordance With the Intended
Use Plan
The State must agree to expend DWSRF funds in accordance with an
Intended Use Plan (section 1452(b)) that has undergone public review
and comment. (See I.B. for additional details)
14. Assurance That the State Will Provide EPA With a Biennial Report
The State must agree to complete and submit a Biennial Report on
the uses of the DWSRF program. The scope of the report covers both the
Fund and set-aside account activities. The contents of the Biennial
Report are discussed in more detail under Part VI of these guidelines.
States which jointly administer DWSRF and CWSRF programs, in
accordance with section 1452(g)(1), may submit a report which covers
both programs. If the State elects to prepare a joint report, it may
either (1) submit a joint report in alternate years and an annual CWSRF
report in the other years or (2) submit a joint report annually.
Even though the report covers both programs, financial information
must be reported separately for each program. For example, the DWSRF
and CWSRF should be reported in separate columns in audited balance
sheets, income statements, and other financial statements.
15. Assurance That the State Will Comply With All Federal Cross-Cutting
Authorities
The State must agree to ensure that all applicable Federal cross-
cutting authorities will be complied with. (See IV.A for additional
details.)
B. Intended Use Plan
The central component of the capitalization grant application is an
IUP (section 1452(b)), which describes how the State intends to use
available DWSRF program funds for the year to meet the objectives of
the SDWA and further the goal of protecting public health.
The State must prepare the IUP, and provide it to the public for
review and comment prior to submitting it to the RA as part of its
capitalization grant application. EPA expects that the public review
and comment process that a State uses to discuss the IUP will be open
and that it will provide the public with adequate opportunity to
comment on how the State plans to use capitalization grant funds.
States should also respond to substantial comments received. The State
must include in the capitalization grant application a description of
the public review process and how it responded to major comments and
concerns.
For efficient planning and to maintain consistency in calculating
set-asides, scheduling payments and other matters, each IUP must
conform to the fiscal year adopted by the State for the DWSRF program
(e.g., the State's fiscal year or the Federal fiscal year).
In the IUP, the State must describe how it will use all funds
available to the capitalization grant, including funds that will be
allocated to the set-asides. Specifically, the IUP must describe how
all available funds, including capitalization grants, State match, loan
repayments, interest earnings, bond
[[Page 59849]]
proceeds, and other monies deposited into the DWSRF program, are
intended to be expended. States may, as an alternative, develop the IUP
in a two part process, one part that identifies the distribution and
uses of the funds among the various set-asides and the Fund and the
other part dealing only with project funding in the Fund. The two-part
process would allow a State to submit a capitalization grant
application for a portion of the DWSRF program funds before they
complete all of the specific funding decisions. In this situation, a
State would have to conduct two rounds of public review and comment--
one for the overall distribution of funds and specific details on
particular set-aside uses and the other for the priority project
list(s).
For example, assume that a State has decided to allocate 76% of its
funds to the DWSRF Fund, 10% of its funds to the source water
delineation set-aside, 4% for DWSRF administration, and 10% for the
Public Water System Supervision (PWSS) program set-aside, but the State
has not yet developed its project priority list(s). This State could
seek public review and comment on the allocation of funds and submit a
capitalization grant application for the 24% of funds that will be used
for set-aside purposes. As with all grant applications, the State would
have to include a detailed description of what the set-aside funds
would be used for. The State would then, at a later date, develop the
Fund component, including the project priority list, seek public review
and comment on this list, and then submit an amendment to the
capitalization grant application for the additional funds.
Because the Fund can only provide those types of assistance
described in section 1452(f), funds that the State will use for set-
aside activities must be placed in an account that is separate
(outside) from the Fund account.
The State must prepare an IUP as long as the Fund account and/or
set-aside account funds remain in operation, not just in those years in
which the State submits an application for a Federal capitalization
grant.
States must provide information regarding the IUP in a format and a
manner that are consistent with the needs of the RA.
1. Priority List of Projects, Including Description and Size of
Community
In accordance with Section 1452(b), States must develop a list of
projects that will receive funding in the first year after the grant
award and a comprehensive priority list of eligible projects for
funding in future years. In determining the priority of funding, a
States' ``intended use plan shall provide, to the maximum extent
practicable, that priority for the use of funds be given to projects
that:
i. Address the most serious risk to human health;
ii. Are necessary to ensure compliance with the requirements of
this Title [SDWA] (including requirements of filtration); and
iii. Assist systems most in need, on a per household basis,
according to State ``affordability criteria'' (section 1452(b)(3)).
Section 1452(a)(2) of the Act identifies eligible projects as those
projects ``which the Administrator has determined, through guidelines,
will facilitate compliance with national primary drinking water
regulations* * * or otherwise significantly further the health
protection objectives of this title.''
Taken together, these two sections clearly signal Congressional
intent that States must give maximum priority to projects needed for
SDWA compliance, projects that provide the greatest protection to
public health, and those projects which assist systems most in need on
a per household basis. States must develop a priority list that
reflects this intent and fund projects in this order, to the maximum
extent practicable. The priority system must provide sufficient detail
to permit the public and EPA to readily understand how the system has
been established and the basis for ranking individual systems. A State
that does not adhere to the above stated criteria must detail why they
were unable to do so.
This is clearly different from the provisions in the CWSRF under
which States can fund any project on the priority list regardless of
its position on the list. To comply with this Congressional directive,
EPA will annually review a States actions to see how closely the State
adheres to the priority list.
Although ``readiness to proceed'' is not an appropriate factor in
ranking projects based on their compliance and public health needs, EPA
does recognize that States will need to consider this when deciding
which projects to fund. This will be especially critical in the first
two years, because many highly-ranked projects may not be ready to
apply for assistance. Consequently, EPA will approve priority systems
that take readiness to proceed into account only for the first two
fiscal years.
The IUP list of projects to receive funding (project priority list)
must include the name of the public water system, the priority assigned
to the project, and a description of the project (including the type of
project), the expected terms of financial assistance based on the best
information available at the time the IUP is developed, and the
population of the system's service area at the time of the loan
application.
The comprehensive IUP priority list must include the priority
assigned to each project and, to the extent known, the expected funding
schedule for each project (section 1452(b)(3)(B)). A State may combine
these two lists into one list by identifying which projects on the
single list will receive funding in that year.
The State must seek public review and comment on its IUP. The IUP
project list may be amended during the year under provisions
established in the IUP as long as the project has been previously
identified through the public participation process. The IUP may also
allow for the addition of projects on an emergency basis. Such projects
would include those where some type of failure was unanticipated and
requires immediate attention to protect public health.
A State may bypass a project on the priority project list if the
State's bypass procedures have undergone public review and comment.
These bypass procedures should clearly identify the conditions which
would allow a project to be bypassed and the way the State will
identify which projects would receive the bypassed funds. If a State
elects to bypass a project for reasons other than fiscal capacity or
readiness to proceed, the State must provide a justification for this
bypass and, in each specific instance, describe why it was not
practicable to fund projects that were ranked higher on the priority
list than the funded project. In all such cases, the State must
describe its efforts to adhere to the priority list, as required by the
Act, ``to the maximum extent practicable''. States must work with
bypassed projects to ensure that the project will be eligible for
funding in the following fiscal year, to the maximum extent possible.
A State must annually use at least 15% of all funds credited to the
Fund account to provide loan assistance to systems serving fewer than
10,000 persons (section 1452(a)(2)), to the extent that there are a
sufficient number of eligible projects to fund. States must determine
the amount to be used for this provision based on the level of
available funds that the State expects to have for funding DWSRF
projects during the period covered by the IUP. A State that does not
use at least 15% of the available funds for small systems must describe
in the next IUP the steps it is
[[Page 59850]]
taking to ensure that a sufficient number of projects are identified to
meet this requirement in future years. States that exceed the
prescribed percentage of assistance to these systems in one year may
bank the excess toward future years.
2. Description of Criteria and Method Used for Distribution of Funds
The IUP must describe the criteria and method that the State will
use to distribute all funds. This description shall include: (1) The
process and rationale for distribution of funds between the Fund and
the set-aside account, (2) the process for selection of systems to
receive assistance, (3) the priority and allocation of assistance the
State gives to different eligible categories of projects, (4) the
rationale for providing different types of assistance and terms (e.g.,
length of repayment, interest rate), including a description of the
financial planning process undertaken by the Fund, and (5) the impact
of all funding decisions (e.g., set-aside, disadvantaged communities)
on the long term financial health of the Fund.
3. Description of the financial status of the DWSRF Program
The IUP must include a description of the financial status of the
DWSRF Program. This description should detail: The total dollar amount
in the Fund; the total dollar amount used as set-asides, including the
level of funds banked; the types of projects to be funded; and the
amount of the capitalization grants that will be used for disadvantaged
community assistance. The IUP should include factors such as expected
estimated loan demand, whether the State will leverage, and other
factors that determine the short-term and long-term focus and health of
the program.
4. Description of the short- and long-term goals of the DWSRF Program
The IUP must describe the short term goals of the DWSRF program,
including how the capitalization grant funds will be utilized to ensure
compliance and protect public health goals of the Act.
The IUP must also describe the objectives of the DWSRF program over
the long-term, and how these objectives can be realized. These
objectives include public health, compliance with the Act, assisting
systems to ensure affordable water and maintaining the long-term
viability of the Fund. The IUP should include a description of how the
DWSRF program funds will be used to support other components of the
State drinking water and ground water programs, including water system
restructuring, capacity building, operator certification, source water
protection, and wellhead protection.
5. Description of amounts transferred between the DWSRF and the CWSRF
The Governor of a State may transfer up to 33% of the DWSRF
capitalization grant to the CWSRF or an equivalent amount from the
CWSRF to the Fund, starting a year after the State has received its
first DWSRF capitalization grant (project funds), but no later than the
beginning of FY 2002 (section 302 of Pub. L. 104-182). EPA will provide
additional guidelines concerning these fund transfers at a later date.
6. Description of the set-aside activities, and percentage of funds,
that will be funded from the DWSRF capitalization grant, including
DWSRF administrative expenses allowance, PWSS program support,
technical assistance, etc.
The IUP must identify what portion of the capitalization grant a
State is electing to use for set-aside activities (e.g., section
1452(g)(2), section 1452(k)), and place those funds in a set-aside
account. The set-aside account must be dedicated to supporting the
other activities authorized in section 1452. The IUP must describe how
the funds in the separate account(s) will be used and provide a
schedule for their expected use. A State must describe how it intends
to use the funds and the expected accomplishments that will result from
use of the funds for a given purpose. For project set-aside funds, the
State must describe, at a minimum, the process by which projects will
be selected and how the funds will be distributed.
Recipients of 1452(k) land acquisition or source water protection
loans are required to repay the loans in the same manner as loans from
the Fund. The State may place the repayments in the Fund or it may set
up a separate account to continue funding eligible 1452(k) loan
activities. Subsequent loans from this separate account must meet the
same requirements as loans from the Fund.
7. Description of how a State disadvantaged community program will
define a disadvantaged system and the amount of DWSRF funds that will
be used for this type of loan assistance
A State may provide additional loan subsidies, including
forgiveness of principal, to disadvantaged communities receiving Fund
loans (section 1452(d)). If the State establishes a disadvantaged
community program it must describe in the IUP how the program will
operate. Using the best information available at the time of the IUP,
this description must include: (1) A definition of disadvantaged
community, (2) the total amount of the capitalization grant that may be
used for providing additional subsidies, (3) to the maximum extent
practicable, an identification of systems that will receive additional
subsidies and the amount and (4) a description of affordability
criteria that the State will use to determine the level of principal
forgiveness.
The value of loan subsidies a Fund provides during the fiscal year
adopted by the IUP under this provision cannot exceed 30 percent of the
amount of the capitalization grant for that year (1452(d)(2)). Loan
subsidies under this provision cannot be banked for future use.
C. Capitalization Grant Agreement
The Capitalization Grant Agreement (CGA) is the principal
instrument by which the State commits to manage its DWSRF program, and
to ensure that it conforms with the requirements of the SDWA Amendments
of 1996. The CGA contains, or incorporates by reference, the following
parts of the agreement: the application; the IUP; the agreed upon
payment schedule; certifications or other agreement requirements
discussed in the first section; the operating agreement, if used, and
other documentation required by the RA. In addition to these
requirements, the CGA must also define the types of performance
measures, reporting requirements, and oversight responsibilities that
will be required to determine compliance with section 1452. Agreement
is also needed on the contents of the Biennial Report, annual audit,
and the EPA review. Table 1 describes how each of the following
assurances and CGA requirements must be addressed.
The capitalization grant agreement must also describe the process a
State will use to ensure that systems have the technical, financial,
and management capacity to operate the system before receiving a loan.
If a system in non-compliance is going to receive a loan, the State
must describe how the system has changed or will change its operation
over the long-term.
A State may also place into a separate, non-project administration
account, loan application fees or other program fees or assessments
that a DWSRF program collects from loan recipients to help offset the
cost of running the DWSRF program. Because these fees and assessments
would be considered program income under the Agency's general grant
regulations (40 CFR 31.25),
[[Page 59851]]
the grant agreement must specify that they will be used for purposes
directly related to the DWSRF program, that they will not be made
available for other purposes and that they will be properly accounted
for in the annual audit. The IUP must identify the amount of any fees
that are placed in the non-project administration account and describe
how they are used.
D. Operating Agreement
The framework and procedures of the DWSRF program that are not
expected to change annually may be described in an Operating Agreement
(OA) that can be included as part of the Capitalization Grant
Agreement. The grant application and subsequent grant agreement may
incorporate by reference relevant portions of the previous year's
application. If there are proposed changes to the OA, the State will
need to negotiate changes with the Region that may be necessary prior
to submitting the next capitalization grant application.
The decision to prepare an OA does not entail additional program
requirements, demonstrations or documentation. The OA simply describes
the structure of the State's program, explains its goals and
objectives, and includes review, overview, accounting, auditing and
sanction provisions. Upon the successful completion of negotiations,
the OA must be signed by the State signatory to the CGA and the
Regional Administrator. On an annual basis, the OA must be supplemented
with an Intended Use Plan that identifies the projects and activities
that the State plans to support with financial assistance from the
fund. Based on the OA and the Intended Use Plan, the Region will award
a capitalization grant to the State. Regions and States that choose
this alternative method of program implementation may find that it
facilitates their program management capability.
II. Allotment/Use of Funds
Section 1452(m) authorizes a total of $9.6 billion for the DWSRF
program from FY 1994 through FY 2003. This section describes allotment,
reallotment, and withholding of these funds; national and State set-
asides; and types of financial assistance available from the Fund.
A. Allotment/Reallotment/Withholding of Funds
1. Allotment Formula
Funds available to States from FY 1997 appropriations will be
allotted according to the formula used for distributing Public Water
System Supervision (PWSS) grants under section 1443 in FY 1995. Funds
available to States from FY 1998 appropriations and beyond will be
allotted according to a formula that reflects the needs identified in
the most recent Needs Survey conducted pursuant to section 1452(h). In
each case, the minimum proportional share established in the formula
that each State will receive will be one percent of the funds available
for allotment to all the States. The District of Columbia will also
receive a one-percent share of available funds (section 1452(a)(1)(D)).
The Virgin Islands and the Pacific Island territories will together
receive an allotment of 0.33 percent (section 1452(j)).
2. Period of Availability and Reallotment
Funds are available to the States during the fiscal year in which
they are authorized and during the following fiscal year (section
1452(a)(1)(C)). The amount of any allotment not obligated to the State
at the end of this period of availability will be reallotted among
other States according to the original formula used to allot these
funds (FY 1997 funds: PWSS formula; FY 1998 funds and beyond:
appropriate Needs Survey). Any State that has not obligated all of the
funds allotted to it in the period of availability shall not be
eligible to participate in the reallotment of funds for that particular
fiscal year. The Administrator may reserve up to 10 percent of the
funds available for reallotment to provide additional assistance to
Indian tribes (section 1452(a)(1)(E)).
3. Withholding of Funds
a. The Administrator will withhold funds under the following
provisions:
i. Capacity Development Authority--The Administrator will withhold
20% of a State's allotment unless the State has obtained the legal
authority or other means to ensure that all new community water systems
and new nontransient, noncommunity water systems commencing operation
after October 1, 1999, demonstrate technical, managerial, and financial
capacity with respect to each drinking water regulation in effect. This
withholding provision becomes effective in FY 1999, which begins
October 1, 1998. For any capitalization grant applications awarded
after October 1, 1998, but before October 1, 1999 (FY 1999 funds), EPA
will not obligate 20 percent of capitalization grant funds allotted to
a State that does not have adequate authority in place. If a State
documents by September 30, 1999, that the authority is in place to
ensure that new systems demonstrate adequate capacity, then EPA will
award the unobligated FY 1999 funds. If a State does not have the
authority in place by September 30, 1999, it will lose the 20 percent
of FY 1999 funds that were not awarded originally. EPA will withhold
20% of each successive capitalization grant allotted to a State and the
withheld funds will be reallotted. The withholding provision will cease
to apply to federal funds appropriated starting the next fiscal year
after a State obtains the required authority.
ii. Capacity Development Strategy--The Administrator will withhold
funds from any States that are not developing and implementing a
strategy to assist public water systems in acquiring and maintaining
technical, managerial, and financial capacity. The amount of a State's
allotment under section 1452 that will be withheld on October 1 of each
fiscal year is 10 percent of FY 2001 allotments, 15 percent of FY 2002
allotments, and 20 percent of each subsequent year's allotments. The
determination of when the State meets the requirement will occur on
October 1 of each year. States not meeting the requirement for that
fiscal year's federal appropriation will lose funds to reallotment
regardless of when the State submits the capitalization grant
application. Funds will no longer be withheld once a State develops and
implements its capacity development strategy. The withholding provision
will cease to apply to federal funds appropriated starting the next
fiscal year after a State obtains the required authority. EPA plans to
issue separate guidelines for States to use in developing these
strategies.
The total amount of funding that will be withheld if a State fails
to meet the requirements of both of the capacity development provisions
is 20 percent of the capitalization grant (section 1452(a)(1)(G)(i)).
iii. Operator Certification Program--The Administrator will
withhold 20% of a State's funds unless the State has adopted and is
implementing a program for certifying operators of community and
nontransient, noncommunity public water systems. This withholding
provision will begin two years after the Administrator publishes
guidelines for certification of operators. The Administrator is
required to publish guidelines no later than February 6, 1999. The
withholding provision will cease to apply to federal funds appropriated
the next fiscal year after a
[[Page 59852]]
State complies with the requirement (section 1452(a)(1)(G)(ii)).
b. Reallotment of withheld funds.
All funds withheld from a State because the State does not have the
capacity development authority, does not develop and implement a
capacity development strategy, and/or does not develop and implement an
operator certification program, will be reallotted, using the same
formula that was originally used to allot those funds. A State that has
funds withheld for any one of these three activities is not eligible to
receive reallotted funds for that activity. Thus, if a State does not
develop an operator certification program but does have a capacity
development strategy, the State would be eligible to receive a
reallotment from withheld funds from States without capacity
development programs but would not be eligible for reallotted funds
under the operator certification provision. A State would also have to
be eligible to receive reallotted funds in accordance with the
reallotment provisions in section 1452(a)(1)(E) prior to being eligible
to receive reallotted funds under the specified withholding provisions.
This section limits reallotment to those States that have obligated all
of their allotment during the period of availability.
c. Loss of primacy.
A State may not receive capitalization grant funds if the State had
primary enforcement authority (primacy) for drinking water pursuant to
section 1443 (section 1452(a)(1)(F)) on the date of enactment of the
Safe Drinking Water Amendments of 1996 (August 6, 1996) and the State
subsequently loses primacy. A State would not be eligible for future
capitalization grants until primacy is restored. Wyoming and the
District of Columbia did not have primacy prior to August 6, 1996.
However, the law provides that they are eligible to receive DWSRF
funds. The Administrator may reserve funds from the allotment of a
State that loses primacy for use by EPA to administer primary
enforcement responsibilities in that State. The balance of the funds
not used by EPA to administer primacy will be reallotted to other
States pursuant to section 1452(a)(1)(E).
B. Set-asides From the National Appropriation and Ceilings on State
Allotments
Section 1452 authorizes numerous national set-sides from the
appropriation for that section and allows States to use certain
percentages of their allotment for various purposes other than project
construction. Table 2 provides an overview of the available set-asides.
Table 3 presents a flow chart for calculating these set-asides and
Table 4 gives a numerical example of the set-asides. States need to
determine the level of funds necessary to evaluate short-term program
needs to protect public health and prevent contamination versus the
long-term need to maintain an adequate level of infrastructure to
address system needs over the long-term.
1. National Set-Asides
The National set-asides are reserved from the funds annually
appropriated by Congress to carry out section 1452. These set-asides
are:
a. Indian Tribes/Alaska Native Villages. The Administrator may
reserve (the Administrator will provide these funds) 1.5% from annually
appropriated funds for grants to Indian Tribes and Alaska Native
Villages (section 1452(i)). EPA will provide separate guidelines
regarding the selection of projects, project management, and program
oversight for these grants. Indian Tribes and Alaska Native Villages
that have not otherwise received either grants or DWSRF assistance
under 1452 for a specific project are eligible to receive grants under
this provision.
b. Health effects studies. Section 1452 requires the Administrator
to reserve $10 million from annually appropriated funds to conduct
health effects studies on drinking water contaminants (section
1452(n)).
c. Unregulated contaminant monitoring. Starting in FY 1998, section
1452 requires the Administrator to reserve $2 million from annually
appropriated funds (section 1452(o)) to pay for the costs of monitoring
unregulated contaminants under section 1445(a)(2)(C).
d. Small system technical assistance. The Administrator may reserve
up to 2% of the funds annually appropriated in FYs 1997-2003 to carry
out the technical assistance provisions of section 1442(e) to the
extent that the total amount of funding appropriated under section 1442
is not sufficient. The set-aside from section 1452(q) plus the
appropriation in 1442(e) cannot exceed $15 million per year (section
1452(q)).
e. Operator training reimbursement. The Administrator will
reimburse States for the costs of training and certifying operators of
drinking water systems serving 3,300 persons or fewer to meet the
requirements of guidelines that the Administrator must publish by
February 6, 1999 (section 1419(a) and (d)). The Congress has authorized
to be appropriated $30 million annually from FY 1997 through FY 2003
for these reimbursement costs (section 1419(d)(3)). If the
appropriation is not sufficient to meet these requirements, the
Administrator, prior to allocating funds to the States, shall reserve
such sums from 1452(m) as are necessary to provide grants to States.
Funds under this provision are set-aside prior to the allotment of
funds to the States, and will be provided as a separate grant.
2. Allotment for D.C. and Other Jurisdictions
The Administrator shall reserve one percent of the funds allotted
to the States for the District of Columbia. The administrator shall
also reserve up to 0.33% of the total funds allotted to the States for
grants to the Virgin Islands, the Commonwealth of the Northern Mariana
Islands, American Samoa, and Guam (section 1452(j)). The funds will be
allotted according to the formula for allotting PWSS grants under
section 1443(a)(4), and may be used to fund projects eligible for
assistance under section 1452(a)(2). EPA will provide separate
guidelines regarding the management of these set-asides.
3. State Set-aside Activities
Section 1452 authorizes States to provide funding for certain set-
aside activities, described below, provided that the amount of that
funding does not exceed ceilings specified in the Statute. A State must
describe in the IUP the amount of funds that it will use for these
activities. A set-aside account must be set up to accept these funds.
Before cash can be drawn down from the federal ACH, a State must
provide a workplan to EPA describing how the funds will be expended.
When set-asides are used to fund program (non-project) activities,
the State and EPA must negotiate a workplan indicating how funds will
be spent. No cash draws will be authorized from the federal ACH until
the workplan(s) have been approved by EPA. While EPA reserves the right
to require additional information from the States, the workplan should
at a minimum include:
The funding amount in dollars and as a percentage of the
State DWSRF allocation;
The number of FTEs projected for implementing each set-
aside;
The goals and objectives, outputs, and deliverables for
each set-aside;
A schedule for completing activities under each set-aside;
The responsibilities of the agencies involved in
implementing each set-aside;
A description of the evaluation process to assess the
success of work funded under each set-aside.
[[Page 59853]]
If a State does not expend all of its set-aside funds, a State may
redirect the monies to the Fund, or it may redirect the funds to
another set-aside activity as long as the maximum allowed for that
activity has not been reached for the Fiscal Year from which the funds
were derived. Set-aside funds may not be used to subsidize water system
operation and maintenance expenses or for project activities eligible
for funding from the Fund or those projects specifically not eligible
for assistance from the Fund.
a. DWSRF administrative expenses. A State may use up to four
percent of the funds allotted to it for the reasonable costs of
administering the programs under section 1452 and providing technical
assistance (section 1452(g)(2)). These costs may include such
activities as issuing debt; DWSRF program start-up costs; audit costs;
financial, management and legal consulting fees; development of IUP and
priority ranking system; development of affordability criteria; and
cost of support services provided by other State agencies.
Expenses incurred issuing bonds guaranteed by the Fund may be
absorbed by the proceeds of the bonds and need not be charged against
the four percent administrative costs allowance, if done so prior to
depositing the proceeds into the Fund. The net proceeds of those issues
must be deposited in the Fund.
Funds that a State chooses to use for administrative purposes
cannot be deposited into the Fund. Instead, these funds must be
deposited into a separate account, or with other non-project funds.
The State may charge an application fee to process, manage or
review an application for Fund assistance. Such fees may be collected
in an account outside the Fund and used to supplement administrative
expenses. Monies in this non-project fee account must be dedicated to
the administrative purposes associated with the DWSRF program. If fees
are collected and deposited into the Fund account, they are subject to
the stipulated uses of the Fund, which does not include the use of
funds for administrative purposes.
States may recover reasonable costs associated with the development
of the DWSRF program, if the costs were incurred between August 6,
1996, the date of enactment of the SDWA Amendments of 1996, and the
date on which the first capitalization grant for a State was awarded.
Documented reimbursement costs will be counted as part of the amount,
up to four percent, that a State can set aside for administrative
purposes.
If the State does not obligate the entire four percent for
administrative costs in one year, it can bank the excess balance and
use it for administrative costs in later years.
b. State program management. A State may use up to a total of 10
percent of its allotment to:
Administer the State PWSS program;
Administer or provide technical assistance through source
water protection programs, which includes the Class V portion of the
Underground Injection Control Program;
Develop and implement a capacity development strategy; and
Develop and implement an operator certification program
(section 1452(g)(2)).
The State must provide a dollar for dollar match (100 percent for
up to 10 percent of the capitalization grant) for capitalization grant
funds used for these purposes. This match is separate, and in addition
to, the 20 percent match for the capitalization grant. At least one-
half of the State match funds provided by the State must be in addition
to the amount the State expended for the PWSS program in FY 1993 (see
example on following page). Federal grant regulations preclude a State
from using the same State funds to meet match requirements for two
different programs. Thus, the same State dollar cannot be used to meet
this match requirement and the match requirement in section 1443 of the
SDWA (PWSS program grants), except that the FY 1993 match for the PWSS
can offset up to one-half of the match required under section 1452 (g).
Funds used to administer or provide technical assistance for source
water protection programs shall not be used for enforcement actions.
States may credit toward the one-to-one match State dollars used for
the PWSS program that are in excess of the current fiscal year State
match required in section 1443. States may also credit current year
expenditures on capacity development and operator certification
programs toward the State's required match.
If the State does not obligate the entire 10 percent for these
activities in any one year, it can bank the excess balance and use it
for the same activities in later years.
c. Small systems technical assistance. A State may use up to two
percent of its allotment to provide technical assistance to public
water systems serving 10,000 people or fewer (section 1452(g)(2)). If
the State does not use the entire 2 percent for these activities
against a given allotment, it can bank the excess balance and use it
for the same activities in later years. If a State chooses to use funds
under this set-aside, EPA encourages States to use available funds to
support small system efforts to apply for DWSRF loans. A State may use
these funds to support a technical assistance team or to contract with
outside organizations to provide technical assistance.
d. Local assistance and other State programs. A State may fund
several other categories of activities to assist development and/or
implementation of local drinking water protection initiatives (section
1452(k)). A State may use up to 15% of the capitalization grant amount
for specified uses below, with the stipulation that not more than 10%
of the capitalization grant amount can be used for any one activity. A
State is not allowed to bank any of these funds for use in future
years, with the exception of the funds used for source water
delineation and assessment.
Funds loaned out under this section (i and ii) must be repaid in 20
years after completion of a project. States may place repayments in the
project fund or set up a new, separate dedicated account(s) for
1452(k)(1) activities. Assistance from this separate account(s) may
continue to be used for any eligible 1452(k)(1) activity.
State Program Management Match Example
Assume a State will receive a $10 million capitalization grant, and
it would like to use 10% of the funds for this set-aside, which is $1
million. The State must match it with $1 million in State funds.
According to the Statute, a State may receive credit for certain
expenditures in FY 1993 and the current year being discussed, in lieu
of having to match entirely with new appropriations. One important
reminder is that at least one-half of the funds must be in addition to
the amount expended by the State for the PWSS program in FY 1993.
------------------------------------------------------------------------
FY 1993 FY 1997
------------------------------------------------------------------------
PWSS grant.................................... $900,000 $1,200,000
State match for PWSS match.................... 300,000 400,000
Additional State funds........................ 200,000 300,000
------------------------------------------------------------------------
Determination of State Credit
In lieu of providing funds for part or all of this match provision,
many States may be able to credit current funds that a State is using
for its PWSS program or other eligible funding. The Statute allows a
State to use funds expended for
[[Page 59854]]
the PWSS program that are above and beyond the required PWSS State
match, for both the current year ($300,000 for FY 1997 in this example)
and in FY 1993 ($200,000 here). In addition, a State may credit the
funds that the State is using for the State PWSS match portion in FY
1993 only ($300,000). Thus, in this example, you first look at the
$300,000 from FY 1997, since the Statute requires that at least 50% of
the total match come from the current year (FY 1997 in this example).
The State could then potentially use up to $500,000 ($200,000 +
$300,000) from FY 1993. However, in this example, the State would be
limited to the use of $300,000 credit in FY 1993, due to the limitation
of having only $300,000 of credit available in FY 1997. Thus, the State
could use a total of $600,000 without providing new appropriations or
other in-kind services. If the State wants to use the remaining
$400,000 ($1 million less $600,000 already matched) in eligible set-
aside funds, the State would need to provide an additional $200,000 or
an equivalent amount of in-kind services. This additional $200,000 in
FY 1997 would allow the State to use the additional $200,000 of unused
credit from FY 1993. Thus, the State could take advantage of the full
10% set-aside with only a small amount of new funding or other in-kind
contributions. In-kind services could include funds that the State
currently expends on operator certification or capacity development
programs. The State could also choose to simply use only $600,000 if no
additional funding could be secured.
Second Example
Using the above example, if the State provided no funding for the
PWSS program above the $400,000 State match in FY 1997, the allowable
credit for FY 1997 would be zero. Thus, the State could not receive
credit for FY 1993 allowable credits without providing State
contributions in addition to the PWSS State match in FY 1997. This is
due to the requirement that at least one-half of the funds be in
addition to funding since 1993. For each new dollar the State provides,
up to $500,000, the State could match it with eligible credits from the
FY 1993 expenditures described in the example above. Thus, in order to
use the full $1 million set-aside in this example, a State would have
to provide $500,000 in new funding or in-kind services.
Third Example
Again using the above example, if the State provides $600,000 for
the PWSS program above the State match requirement in FY 1997 (versus
$300,000 as stated above), the State could use the $600,000 from FY
1997 and use $400,000 from FY 1993 as credit for the State match. In
this example, the State would not have to provide any additional match
in cash to take full advantage of this set-aside.
i. Assistance to a public water system to acquire land or a
conservation easement for source water protection purposes:
A State may provide assistance, only in the form of a loan, to a
public water system to acquire land or a conservation easement from a
willing party for the purpose of protecting the system's source
water(s) and ensuring compliance with national drinking water
regulations.
If a State elects to use this set-aside, the State shall develop a
priority setting process, or use an established priority setting
process that meets the same goals, to decide what land or easements can
be purchased. The process must include a requirement that public water
systems demonstrate how the land or easements to be purchased will
directly promote public health protection and/or compliance with
national drinking water regulations. The State must seek public review
and comment on this process. Furthermore, the State must identify
specific parcels of land or easements purchased in the Biennial Report.
ii. Assistance to a community water system to implement voluntary,
incentive-based source water quality protection measures:
A State may make a loan to assist a community water system
implement voluntary, incentive-based source water protection measures
in areas delineated under a source water assessment program described
in section 1453 and for source water petitions. Only community (as
opposed to noncommunity) water systems are eligible for this
assistance. A State may establish a source water petition program and
receive petitions from owners/operators or local governments requesting
State assistance in the development of a voluntary, incentive-based
partnership among systems, local governments, and others likely to be
affected by the management measures. Only pathogenic organisms,
chemicals in source water at levels above a drinking water standard, or
chemicals that are not reliably and consistently below the drinking
water standard can be identified as contaminants in a petition.
If a State elects to use this set-aside, the State must develop a
list of systems that will receive loans, giving priority to projects
that promote compliance and public health protection, and then seek
public review and comment on this list.
iii. Provide funding to delineate and assess source water
protection areas:
A State may use up to 10 percent of its FY 1997 capitalization
grant to delineate and/or assess source water protection areas for
public water systems in accordance with section 1453. Assessments
include the identification of potential sources of contamination within
the delineated areas. These assessment activities, which primacy States
are required to undertake, are limited to the identification of
contaminants regulated under the SDWA, or unregulated contaminants,
selected by the State, at its discretion, when the State determines
that they may pose a threat to public health. Funds set aside for this
purpose shall be obligated by the State within four fiscal years after
the State receives the grant from which the funds are set-aside.
Funds are available from the capitalization grant only for FY 1996
and FY 1997 to delineate and assess source water protection areas in
accordance with section 1453.1 Since there are no FY 1996
funds available for the DWSRF program, FY 1997 is the only year when
funds will be available for this important activity. EPA encourages
States to determine the level of activity necessary to delineate and
assess their source water protection areas, and determine the level of
funding necessary to complete these activities. If needed, States
should take up to 10 percent of fiscal year capitalization grant
allowed by law. EPA will review the State's determination as part of
the capitalization grant application review.
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\1\ States may use funds from this set-aside for the development
of Total Maximum Daily Loads (TMDL's) in limited circumstances. The
State must establish a policy of allowing use of set-aside funds to
develop TMDL's only if a clear cause and effect relationship can
demonstrate that development of the TMDL is essential to public
health protection and continuing compliance with national primary
drinking water regulations. Funding TMDL's through source water set-
asides is only eligible if it will prevent or reduce source water
contamination or enhance the efficiency of the drinking water
treatment process. In this context, TMDL activity should be weighed
against other source water assessment and delineation priority
activities. State source water assessment programs submitted to EPA
that propose to include TMDL activity shall ensure that the
development of TMDL's does not delay the completion of the source
water assessments.
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iv. To support the establishment and implementation of wellhead
protection programs:
The State may make expenditures from the set-aside account to
establish and implement wellhead protection
[[Page 59855]]
programs (WHP) under section 1428. Funds can be used to establish a WHP
program, which a State must then submit to the EPA Region for approval.
The WHP activities to be funded must be identified in the IUP.
v. To provide funding to a Public Water System to implement a
technical or financial assistance under the capacity development
strategy:
A State may provide assistance to a public water system as part of
a capacity development strategy under section 1420(c).
e. Movement of funds between the Fund and set-aside account after
award of capitalization grant. If provided for in the IUP, a State may
move funds among set-aside activities or from the set-aside account(s)
to the Fund after receiving an approved amendment to the capitalization
grant. Once payments have been made (according to the schedule outlined
in the capitalization grant award), the project funds will be
considered part of the Fund and may only be used for the authorized
purposes.
f. Transfer of funds. Section 302 of the SDWA Amendments of 1996
allows a State to transfer up to 33% of the capitalization grant made
to a State under section 1452(m) to the CWSRF or an equivalent amount
from the CWSRF to the DWSRF. This transfer is at the Governor's
discretion and cannot occur until at least a year after the State has
received its first DWSRF capitalization grant. EPA plans to issue
guidelines at a later date concerning this transfer provision.
C. Types of Financial Assistance That the Fund May Provide
A Fund may make loans for project construction, purchase or
refinance local debt obligations, guarantee or purchase insurance for
local debt issues, provide revenue for or secure State bonds if the
proceeds of the bonds are deposited in the Fund, and earn interest on
Fund accounts (section 1452(f)).
1. Loans
A Fund may make loans with interest rates that are less than or
equal to the market interest rate, including zero percent loans. The
State is responsible for identifying in the IUP the method it will use
to determine the ``prevailing'' market interest rate at the time a
particular loan is executed with an assistance recipient. As part of
its capitalization grant application, the State should outline its
policy with respect to interest rate terms for various potential
categories of assistance recipients.
A State may issue separate loans for planning, design, and
construction costs. If the State had made prior loans to a recipient,
the Fund may ``roll over'' the separate loans into a subsequent loan
for construction. A State may also provide ``incremental'' assistance
to finance a multi-year construction activity (e.g., for particularly
large, expensive projects).
a. Repayment of loan. Assistance recipients (borrowers) must begin
repayment of the loan(s), as provided in the loan agreement, not later
than one year after completion of the project. A project is considered
complete when the operations are initiated or are capable of being
initiated. Recipients must complete loan repayment not later than 20
years after the completion of the project. However, States which
establish a disadvantaged community loan program pursuant to section
1452(d) may provide loans to qualified recipients for up to 30 years,
as long as the period of the loan does not exceed the expected design
life of the project.
b. Dedicated repayment source. Each loan recipient (except for
disadvantaged subsidy portion) must establish a dedicated source of
revenue (or in the case of a privately owned system, demonstrate that
there is adequate security) for repayment of the principal and interest
due on the loan which is consistent with local ordinances and State
laws. In most cases, this will be a pledge of revenues from user
charges, while for privately owned systems, it could include the pledge
of accounts receivable and proceeds therefrom.
c. Financial security of privately-owned systems. Eligible water
systems that are privately owned must demonstrate that there is
adequate security to assure repayment of the loan. In some cases a
State may determine that it is appropriate to require such systems to
provide credit enhancements, to pledge a variety of collateral, and/or
to provide other types of security, such as corporate or personal
guarantees.
d. Financial, technical, and managerial capability analysis. The
State shall review the overall financial capability of the recipient to
repay the loan as well as technical and managerial capability of the
assistance recipient to maintain compliance with the SDWA (section
1452(a)(3)(A)(i)). Findings of the financial capability analysis may be
used to determine the terms of assistance for applicants. The State may
not provide assistance to any system that does not have the technical,
managerial or financial capability to ensure compliance with the SDWA
or is in significant non-compliance with any drinking water standard or
variance. However, if assistance will ensure compliance or if the
system's owner or operator agrees to take appropriate measures to
ensure that the system has the necessary capability, the State may
provide assistance.
e. Disadvantaged communities. A Fund may provide additional loan
subsidies (e.g., principal forgiveness, negative interest rate loans)
to benefit communities meeting the definition of ``disadvantaged'' or
which the State expects to become disadvantaged as a result of the
project. A ``disadvantaged community'' is one in which the entire
service area of a public water system meets affordability criteria
established by the State after public review and comment (section
1452(d)). The Administrator shall publish information, within 18 months
after enactment of the SDWA amendments, to assist States in developing
affordability criteria. EPA will undertake this effort in consultation
with States and the Rural Utilities Service.
The State should take its affordability criteria into account when
deciding the level of subsidy a disadvantaged community will receive,
in order to make the loan affordable. Where capability of the system is
an issue, the State must ensure that, prior to necessary funding and
any other actions, the system has adequate financial, technical and
managerial capability to maintain compliance.
The value of subsidies that a Fund provides during a particular
fiscal year's capitalization grant cannot exceed 30 percent of the
amount of the capitalization grant for that year (1452(d)(2)).
Subsidies under this provision cannot be banked for future use.
f. Project funding for small systems. The Statute requires that a
State use a minimum of 15 percent of all dollars credited to the Fund
to provide loan assistance to small systems that serve fewer than
10,000 persons. The 15 percent minimum is based on the level of DWSRF
funds that the State expects to have available for funding in the
fiscal year addressed by the IUP.
2. Buy or Refinance Existing Debt Obligations
A Fund may buy or refinance debt obligations of municipal,
intermunicipal or interstate agencies, where the initial debt was
incurred and construction started after July 1, 1993 (section
1452(f)(2)). Private systems are not eligible for refinancing under
section 1452(f)(2). Refinancing may entail purchasing existing
municipal debt such that the proceeds of the transaction
[[Page 59856]]
may be used to call the bonds. This provision is intended to encourage
projects to proceed using their own means of financing in advance of
the availability of Fund assistance, by offering the prospect of
project refinancing at better financial terms at a later date.
Projects incurring debt and initiating construction between July 1,
1993 and the effective date of a State capitalization grant must meet
the eligibility requirements of section 1452 to be eligible for
refinancing. Where the original debt for a project was in the form of a
multi-purpose bond incurred for purposes in addition to eligible
purposes under section 1452, a Fund may provide refinancing only for
eligible purposes, not for the entire debt.
If a State has credited repayments of loans made under a pre-
existing State loan program as part of its State match (see V.A.), the
State cannot also refinance the projects under the DWSRF. If the State
has already counted certain projects toward its State match which it
now wants to refinance, the State must provide replacement funds for
the amounts previously credited as match.
The State should seek the advice of bond counsel or tax attorneys
to ensure that these refinances do not conflict with Federal law.
3. Guarantee or Purchase Insurance for Local Debt Obligations
A Fund may provide assistance to improve the marketability of local
debt obligations or to reduce interest rates to attract potential
buyers of the bonds and loans (section 1452(f)(3)). These credit
enhancements may take the form of guarantees or purchases of insurance,
which are available from a number of insurance companies. Assistance of
this type is limited to local debt obligations that are undertaken to
finance projects eligible for assistance under section 1452.
4. A Source of Revenue or Security for Payment of Fund Debt Obligations
The State may use assets deposited in the Fund to ``leverage''
(i.e., increase) the total amount of funds available within the Fund
(section 1452(f)(4)). Leveraging is accomplished by using Fund assets
as a source of revenue or security for the payment of the principal and
interest on revenue or general obligation bonds issued by the State.
The net proceeds of the sale of the bonds secured by the Fund must be
deposited into the Fund.
The security may be provided by any of the assets of the Fund,
including an existing Fund balance and future revenues from loan
repayments. The State may also choose to borrow against the repayment
stream from outstanding loans made from an initial set of
capitalization grants (or part of the capitalization grant or State
match), thus increasing the financial resources of the Fund much sooner
than would otherwise be possible. Bonds may be issued by an
instrumentality of the State, including the State agency responsible
for administering the Fund.
Note that the use of a capitalization grant to leverage does not,
in and of itself, satisfy any requirements on the use of DWSRF funds.
The proceeds of the bond issue must ultimately be used for providing
loans and other assistance to satisfy the requirements of section 1452.
For the purposes of this section, ``net proceeds'' is defined as
the funds raised from the sale of the bonds minus issuance costs (e.g.,
the underwriting discount, underwriter's legal counsel fees, bond
counsel fees, financial advisor fees, rating agency fees, printing of
disclosure documents/bond certificates, trustee banks' fees, various
forms of credit enhancement and enhancement and other costs that may be
incurred by a State agency incidental to the bond issuance).
Funds in a CWSRF cannot secure bonds issued for DWSRF assisted
projects, and vice-versa, where there is the potential that assets in
one Fund could be used for a purpose not authorized by the law
establishing that Fund. Funds in a CWSRF cannot be used to cure a
default on a project receiving DWSRF assistance because it is not an
authorized type of assistance, nor is the project eligible, under title
VI of the Clean Water Act. However, States may propose other leveraging
methods relying on one or both Fund's assets where the potential for
using those assets for an unauthorized purpose does not exist. For
example, a State may use the authority to reserve one program's
capitalization grant funds under section 302 of the SDWA Amendments to
further secure a bond issued for one or both SRF programs. Such
leveraging methods must be reviewed by the Regional Office and by EPA
Headquarters before they can be implemented by the State.
5. Earn Interest on Fund Accounts
Sections 1452(c) and 1452(f)(5) authorize the State to earn
interest on Fund accounts prior to disbursement of assistance (e.g., on
reserve accounts used as security or guarantees). Dollars deposited
must not remain in the Fund primarily to earn interest. States and
municipalities should obtain the legal opinion of a bond counsel or tax
attorney with respect to using the Fund to earn interest on the
proceeds of a tax-exempt issue.
There are limits to the type of investments that a State can make
with Fund accounts. Funds not required for current obligation or
expenditure must be invested in interest bearing obligations (section
1452(c)). The authority to earn interest does not include investment
methods that earn dividends or yields other than interest. Most States
have laws that restrict the eligible investments of these fund
accounts. Furthermore, if a State engages in a leveraged program, there
may be restrictions on eligible investments in the trust indenture
securing the bonds. In certain cases, the Federal tax code may limit
the investments a leveraged program can make with fund accounts.
III. Eligible Systems and Projects
A. Eligible Systems
Drinking water systems that are eligible for Fund assistance are
community water systems, both privately and publicly owned, and
nonprofit noncommunity water systems. Federally-owned systems are not
eligible to receive Fund assistance (section 1452(a)(2)).
Fund managers should seek tax advice if they plan to issue bonds,
to ensure that the requirements of the Private Activity Use Rule are
met, particularly with regard to funding eligible private systems.
Drinking water systems that have components of their systems in
more than one State are eligible to receive funding after consultation
with the regulatory agencies involved.
B. Eligible Projects
1. Compliance and Public Health
A DWSRF may provide assistance only for expenditures (not including
monitoring, operation, and maintenance expenditures) of a type or
category which will facilitate compliance with national primary
drinking water regulations applicable to the system under section 1412
or otherwise significantly further the health protection objectives of
the Act (section 1452(a)(2)).
Projects to address SDWA health standards that have been exceeded
or to prevent future violations of the rules are eligible for funding.
These include projects to maintain compliance with existing regulations
for contaminants with acute health effects (i.e., the Surface Water
Treatment Rule, the Total Coliform Rule, and nitrate standard) and
[[Page 59857]]
regulations for contaminants with chronic health effects (i.e., Lead
and Copper Rule, Phases I, II, and V rules, and safety standards for
total trihalomethanes, arsenic, barium, cadmium, chromium, fluoride,
mercury, selenium, combined radium-226, -228, and gross alpha particle
activity).
Projects to replace aging infrastructure are also eligible if they
are needed to maintain compliance or further the public health
protection goals of the Act. Examples of these include projects to:
Rehabilitate or develop sources (excluding reservoirs,
dams, dam rehabilitation and water rights) to replace contaminated
sources;
Install or upgrade treatment facilities if, in the State's
opinion, the project would improve the quality of drinking water to
comply with primary or secondary standards;
Install or upgrade storage facilities, including finished
water reservoirs, to prevent microbiological contaminants from entering
the water system; and
Install or replace transmission and distribution pipes to
prevent contamination caused by leaks or breaks in the pipe, or improve
water pressure to safe levels.
Projects to consolidate water supplies--for example, when
individual homes or other public water supplies have a water supply
that is contaminated, or the system is unable to maintain compliance
for financial or managerial reasons--are eligible for DWSRF assistance.
The purchase of a portion of another system's capacity is eligible
for a loan, if it is the most cost-effective solution.
2. Loan Assistance to Systems That Meet the Definition in Section
1401(b)
Certain entities that deliver water through constructed
conveyances, other than piped water systems, are not currently
considered public water supplies. The SDWA Amendments would classify
such systems as public water systems unless they comply with provisions
of 1401(b).
These systems are eligible for section 1452 funds for the purposes
specified in 1401(b).
3. Land Acquisition
Land is eligible only if it is integral to a project that is needed
to meet or maintain compliance and further public health protection. In
this instance, land that is integral to a project is only the land
needed to locate eligible treatment or distribution projects. In
addition, the acquisition has to be from a willing seller. Land that is
necessary for source water protection may be eligible to receive a loan
under section 1452(k).
The cost of complying with the Uniform Relocation Assistance and
Real Property Acquisition Policies Act of 1970 (the Uniform Act) is an
eligible cost to be included in a DWSRF program loan. (See section on
cross-cutters for a more detailed discussion of the Uniform Act.)
4. Planning and Design of a Drinking Water Project
A Fund may provide assistance for the costs of project planning,
design and other related costs. The provision of assistance for design
and planning costs does not guarantee a system that the DWSRF program
will provide funding for the construction of the project. The State may
choose to combine the loan for planning and design with a construction
loan.
Costs to municipalities for preparing environmental assessment
reports may be included as part of the costs of planning a project.
Costs incurred by the State in reviewing the environmental assessments
are considered DWSRF administrative costs.
5. Restructuring of Systems That Are in Noncompliance or That Lack the
Technical, Managerial and Financial Capability to Maintain the System
A Fund may provide assistance to an eligible public water system to
consolidate with other public water system(s) only if the assistance
will ensure that the system returns to and maintains compliance with
SDWA requirements (section 1452(a)(3)(B)).
If the system does not have the technical, managerial, and/or
financial capability to ensure compliance, or is in significant
noncompliance, the system may receive assistance only if (1) the
assistance will ensure compliance, or (2) the owner or operator of the
system agrees to undertake appropriate changes in operations. These
changes include consolidation or management changes that will ensure
that the system has the technical, managerial, and financial capability
to ensure and maintain compliance with SDWA requirements. Costs
associated with consolidation, such as legal fees and water buy-in
fees, are eligible for funding.
A State should establish criteria or guidelines to help assess what
types of operational or management changes may be appropriate for a
water system. Further, a State should define when a system would be a
good candidate for physical consolidation to solve a compliance or
long-term financial issue, or when a system could consolidate by other
means, such as through management consolidation.
C. Projects Not Eligible for Funding
The Fund cannot provide funding assistance for the following
projects and activities:
Dams, or rehabilitation of dams;
Water rights, except if the water rights are owned by a
system that is being purchased through consolidation as part of a
capacity development strategy;
Reservoirs, except for finished water reservoirs and those
reservoirs that are part of the treatment process and are located on
the property where the treatment facility is located;
Laboratory fees for monitoring;
Operation and maintenance expenses;
Projects needed mainly for fire protection;
Projects for systems that lack adequate technical,
managerial and financial capability, unless assistance will ensure
compliance;
Projects for systems in significant noncompliance, unless
funding will ensure compliance;
Projects primarily intended to serve future growth.
1. Lack of Technical, Managerial and Financial Capability
A Fund may not provide any type of assistance to a system that
lacks the technical, managerial or financial capability to maintain
SDWA compliance, unless the owner or operator of the system agrees to
undertake feasible and appropriate changes in operation or if the use
of the financial assistance from the DWSRF will ensure compliance over
the long-term (section 1452(a)(3)(B)(i)). The State shall develop a
capacity program to evaluate each system to be funded to ensure it has
adequate capacity to receive funding.
2. Significant Noncompliance
A Fund may not provide assistance to any system that is in
significant noncompliance with any national drinking water regulation
or variance unless the State conducts a review and determines that the
project will enable the system to return to compliance and the system
will maintain an adequate level of technical, managerial and financial
capability to maintain compliance (section 1452(a)(3)(B)(ii)).
3. Growth
A Fund cannot provide assistance to finance the expansion of any
drinking water system solely in anticipation of future population
growth (section
[[Page 59858]]
1452(g)(3)(C)). However, assistance may be provided to address
population growth expected to occur over the useful life of the
facility to be funded. In determining whether or not a project is
eligible for assistance, the State must determine the primary purpose
of the project. If the primary purpose is to supply or attract growth,
the project is not eligible to receive DWSRF funds. If the primary
purpose is to solve a compliance or public health problem, the entire
project, including the portion necessary to accommodate a reasonable
amount of growth over its useful life, is eligible. In reviewing the
proposed project, the State should review the basis for, and
reasonableness of, the population projections.
A State must also consider the extent of current risk to public
health in establishing funding priorities. Consequently, if a project
includes substantial growth, it must be placed at the lower end of the
priority list. It would be contrary to the intent of Congress, as
reflected in the ``anticipation of growth'' provision, to fund a
project with the prospect of a substantial amount of growth ahead of a
project where a significant portion is attributable to rectifying a
current health threat.
D. Compliance Without DWSRF Funding
The inability or failure of any public water system to receive
assistance from a Fund or any other funding agency, shall not alter the
obligation of a drinking water system to comply in a timely manner with
all applicable drinking water standards and requirements of section
1452 (section 1452(l)).
IV. State/Project Level Authorities
A. Cross-Cutting Federal Authorities
There are a number of Federal laws, executive orders and
government-wide policies that apply by their own terms to projects and
activities receiving Federal financial assistance, regardless of
whether the statute authorizing the assistance makes them applicable.
These ``cross-cutting Federal authorities'' (cross-cutters) include
environmental laws such as the National Historic Preservation Act and
the Wild and Scenic Rivers Act, and social and economic policy
authorities such as Executive Orders on Equal Employment Opportunity
and government-wide debarment and suspension rules.
A few cross-cutters apply by their own terms only to the State as
the grant recipient (e.g., Drug-Free Workplace Act, Pub. L. 100-692
section 5152 et seq.), because the authorities explicitly limit their
application to grant recipients. In general, however, the cross-cutters
will apply to projects and activities receiving assistance from the
Fund.
The Fund may consist of funds from several sources: Federal grant
dollars, State match amounts, loan repayments, and, perhaps, bond
proceeds. It is therefore difficult to identify which projects are
receiving Federal financial assistance and are thus, subject to the
cross-cutters. Consequently, the cross-cutters will apply to an amount
of funds equaling the amount of the Federal grant. Requirements imposed
by the cross-cutters must be met by projects whose cumulative DWSRF
funding is equivalent to the amount of the capitalization grant
(``equivalency projects'').
The concept of equivalency was developed for the CWSRF program,
although in that program it had an additional feature. In the CWSRF
program, equivalency projects were subject to a number of specific
requirements listed in the Clean Water Act (section 602(b)(6)), as well
as the cross-cutters. In the DWSRF program, the concept of equivalency
is only used to describe which projects must comply with cross-cutters
and which must undergo a tier one environmental review (see IV.B.)
Projects funded with DWSRF monies in amounts greater than the
capitalization grant are not subject to these requirements, but States
that apply cross-cutters to projects whose cumulative funding is
greater than the amount of the Federal capitalization grant may bank
this excess to meet future requirements.
All programs, projects and activities undertaken by the DWSRF
program, including those undertaken as non-equivalency projects, are
subject to Federal anti-discrimination laws, including the Civil Rights
Act of 1964, section 504 of the Rehabilitation Act of 1973 and the Age
Discrimination Act of 1975.
Because of the similarities between the DWSRF and CWSRF programs,
and because the State plays a more substantial role in these two
programs than in other Federal assistance programs (particularly in its
relationship with assistance recipients), the method for applying
cross-cutters in the DWSRF program will be the same as that used in the
CWSRF program. The Agency will remain ultimately responsible for
ensuring that assistance recipients comply with the cross-cutters, but
will carry out this responsibility mainly through its annual oversight
and approval roles. Day-to-day responsibility for overseeing funding
recipients' implementation of the cross-cutters will fall upon the
State. For example, where a cross-cutter requires consultation with
another Federal agency, such as the U.S. Fish and Wildlife Service, the
State will take this action initially. If a compliance issue cannot be
resolved for a particular project through that consultation, then the
State must seek the Regional Office's assistance in settling the
matter. The most recent list of cross-cutters that apply is attached in
Appendix A.
B. Environmental Reviews
The environmental review principles developed for the CWSRF program
will provide the basis for the development of a State environmental
review process (SERP) in the DWSRF program. The SERP that applies to
Fund equivalency projects must be the same as the process for CWSRF
equivalency projects. Non-equivalency projects must also undergo an
environmental review, but the State may elect to apply an alternative
SERP to these projects.
1. Equivalency Projects
Equivalency projects are reviewed under a SERP that is functionally
equivalent to the review followed by the Agency under the National
Environmental Policy Act (NEPA). The State may elect to apply the
procedures at 40 CFR part 6, subpart E and related subparts, or apply
its own ``NEPA-like'' SERP for conducting environmental reviews
developed for the CWSRF program. For equivalency projects, a SERP must
contain the elements described below.
Legal foundation: The State must have the legal authority to
conduct environmental reviews of construction projects receiving Fund
assistance. The legal authority and supporting documentation must
specify:
The mechanisms to implement mitigation measures to ensure
that a project is environmentally sound;
The legal remedies available to the public to challenge
environmental review determinations and enforcement actions;
The State agency that is primarily responsible for
conducting environmental reviews; and
The extent to which environmental review responsibilities
will be delegated to local recipients and will be subject to oversight
by the primary State agency.
Interdisciplinary approach: The State must employ an
interdisciplinary approach for identifying and mitigating adverse
environmental effects
[[Page 59859]]
including, but not limited to, those associated with cross-cutting
Federal environmental authorities.
Decision documentation: The State must fully document the
information, processes and premises that influence its decisions to:
Proceed with a project contained in a finding of no
significant impact (FNSI) following documentation in an environmental
assessment (EA);
Proceed or not proceed with a project contained in a
record of decision (ROD) following preparation of a full environmental
impact statement (EIS);
Reaffirm or modify a decision contained in a previously
issued categorical exclusion (CE), EA/FNSI or EIS/ROD following a
mandatory 5 year environmental reevaluation of a proposed project; and
If a State elects to implement processes for either
partitioning an environmental review or CE from environmental review,
the State must similarly document these processes in its proposed SERP.
Public Notice and Participation: The State must provide public
notice when a CE is issued or rescinded, a FNSI is issued but before it
becomes effective, a decision issued 5 years earlier is reaffirmed or
revised, and prior to initiating an EIS. Except with respect to a
public notice of a categorical exclusion or reaffirmation of a previous
decision, a formal public comment period must be provided during which
no action on a project will be allowed.
A public hearing or meeting must be held for all projects except
for those having little or no environmental effect.
Alternatives Consideration: The State must have evaluation criteria
and processes which allow for:
Comparative evaluation among alternatives, including the
beneficial and adverse consequences on the existing environment, the
future environment and individual sensitive environmental issues that
are identified by project management or through public participation;
and
Devising appropriate near-term and long-range measures to
avoid, minimize or mitigate adverse impacts.
2. Non-equivalency projects.
The State may elect to apply an alternative SERP to non-equivalency
construction projects assisted by the Fund, provided that the process:
Is supported by a legal foundation which establishes the
State's authority to review construction projects;
Responds to other environmental objectives of the State;
Provides for comparative evaluations among alternatives
and accounts for beneficial and adverse consequences to the existing
and future environment;
Adequately documents the information, processes and
premises that influence an environmental determination; and
Provides for notice to the public of proposed projects and
for the opportunity to comment on alternatives and to examine
environmental review documents. For projects determined by the State to
be controversial, a public hearing must be held.
3. EPA approval and Review Process
The RA must review and approve any State ``NEPA-like'' and
alternative procedures to ensure that the requirements for both
equivalency and non-equivalency projects have been met. The RA will
conduct these reviews on the basis of the criteria for evaluating NEPA-
like reviews contained in appendix B to these guidelines. Because these
criteria are also used in the CWSRF program (appendix A to the CWSRF
regulations), a State may simply adopt those for the DWSRF program.
Significant changes to State environmental review procedures must be
approved by the RA. The approved SERP may be incorporated in the
State's operating agreement, if it elects to prepare one. (See I.D.
above)
States should establish administrative procedures for monitoring,
collecting and summarizing environmental review information and provide
documentation of these activities in the Biennial Report. EPA's annual
review will include a review of a sample of DWSRF projects to verify
the application and the adequacy of the SERP.
V. Funding Process
A. 20 Percent State Match
Except for FY 1997 funds, States must deposit the 20% State match
into the Fund on the date of or before receiving payments under the
capitalization grant. In general, State match deposits must be in cash.
When a State opts to use a ``letter of credit'' mechanism for its State
match, payments to this letter of credit account must be made
proportionally on the same schedule as the payments of Federal funds
(as outlined elsewhere in these guidelines) in the capitalization
grant. Monies from this State match letter of credit must be drawn into
the Fund as monies are drawn on the Federal letter of credit (known as
the automated clearinghouse account (ACH)).
When cash is drawn from the Federal ACH for the set-aside account
only, the State may deposit its proportional share into the Fund in the
form of a note receivable rather than actual cash. The note(s) must be
converted to cash prior to the time when cash is drawn from the federal
ACH to the project fund, in order to meet the State match requirement.
For grant payments made to the State from funds appropriated in FY
1997, the State may defer deposit of its matching amount to no later
than September 30, 1999. This flexibility is provided to States which
may need additional time to secure State funding for the required
matching amount. Note that even if the State defers deposit of its
matching amounts, it must identify the source of its matching funds in
the capitalization grant application and agree to provide the State
match for grant payments already received from the FY 1997
appropriations by September 30, 1999. Thus, States will have to match
the funds that have been received as payments or are drawn down in
cash, in order to reach the proportional match requirement of 20%,
before additional funds can be expended from the federal ACH.
States may acquire the matching amount from a variety of sources,
including legislative appropriations, proceeds from State issued bonds,
revenues from State taxes or assessments, and funds maintained in other
State accounts. Bonds issued by the State to derive the match may be
retired from the interest payments made to the Fund on loans awarded by
the Fund if the net proceeds from the State issued bonds are deposited
in the fund. Loan repayments including principal and interest of a loan
must be repaid to the Fund; with only the interest portion of
repayments and interest earnings of the Fund as a source of funds to
retire State bond issues that provide the State match. This flexibility
to retire State debt should not be used to the extent that it endangers
the long term financial goals and objectives, and financial condition
of the DWSRF program, as described in the IUP. If the State provides a
match in excess of the required amount, the excess balance may be
banked toward match requirements associated with subsequent
capitalization grants.
The State may already manage a dedicated revolving fund which
provides assistance for activities consistent with section 1452(a)(2)
of the SDWA. The State may credit toward its match requirement State
monies deposited into this dedicated fund between July 1, 1993 and
prior to the receipt of a capitalization grant under section 1452(a) of
the SDWA if:
(1) The monies were deposited in an SRF that subsequently received
a capitalization grant and, if the deposit
[[Page 59860]]
was expended, it was expended in accordance with section 1452 of the
SDWA;
(2) The monies were deposited in a separate fund that has not
received a capitalization grant, they were expended in accordance with
section 1452 of the SDWA and an amount equal to all repayments of
principal and payments of interest from these loans will be deposited
in the Federally capitalized fund; or
(3) The monies were deposited in a separate fund and used as a
reserve consistent with section 1452 and an amount equal to the reserve
is transferred to the Federally capitalized fund as its function is
satisfied.
B. State Match for the 1452(g)(2) Set-Aside
The State must agree to deposit into the set-aside account where
the 1452(g)(2) funds will be deposited, a dollar for dollar match, up
to 10 percent of the capitalization grant. States may acquire the
matching amounts from a variety of sources, in particular, PWSS funding
credits discussed in II.B.3.b. If additional funds are required, a
State may use legislative appropriation or other State funds.
C. Federal Funding Process
1. General
A State will receive each capitalization grant payment in the form
of an increase to the ceiling of funds available through a separate
Fund account set up in the EPA-Automated Clearing House (EPA-ACH). Cash
will be transferred to the State from the U.S. Treasury on a
reimbursement basis, after the assistance recipient has billed the
DWSRF program for work completed and the DWSRF program requests
reimbursement from EPA. The State then reimburses project assistance
recipients for costs incurred--a process known as the disbursement from
the DWSRF.
2. Schedule of Payments
A State must include a payment schedule in its capitalization grant
agreement that is based on its projection of binding commitments (see
below) and use of set-asides in the State's Intended Use Plan.
Increases in the ceiling of funds available in the EPA-ACH will be made
in accordance with the schedule of payments. All payments will be made
by the earlier of 8 quarters from the date of a capitalization grant
award or 12 quarters from the date of allotment. The schedule of
payments applies to all funds in the capitalization grant, including
those funds that are used for set-aside activities.
3. Binding Commitments
In order to demonstrate continuing progress in project (both Fund
and set-aside projects) initiation, and to further the intent of
Congress to ``commit(s) and expend(s) funds * * * as efficiently as
possible* * *'' (section 1452(g)(3)(A)), the State must agree to enter
into binding commitments to provide financial assistance under the
DWSRF program with assistance recipients. A binding commitment is a
legal obligation by the State to a recipient of assistance that defines
the terms for DWSRF assistance. The binding commitment should include a
description of the project to receive financial assistance, the
expected terms of the assistance, and expected date of project
initiation and project completion.
Binding commitments must be made in an amount equal to the amount
of each grant payment that is deposited into the Fund and State match
within one year after the receipt of each grant payment.
The State must continue to make progress in providing Fund
assistance by entering into binding commitments equaling the amount of
the grant payment and State match within one year after it receives a
grant payment. To facilitate compliance with this requirement, the
State may wish to plan for binding commitments equal to the federal
capitalization grant less the non-project set-asides plus the State
match (Federal funds only for the FY 1997 funds). Then, if some
projects are unable to proceed for unforeseen reasons, the State will
still be able to comply with the requirement. The State may make
binding commitments for more than the required amount, and bank the
``excess'' balance towards the binding commitment requirements of
subsequent grant payments.
If a State is concerned about its ability to comply with the
binding commitment requirement, it should notify the RA before it fails
to fulfill its responsibility, and propose a revised payment schedule.
4. Cash Draw
The ACH process is structured so that neither the DWSRF program nor
the assistance recipients will be required to provide interim financing
on financial transactions of the DWSRF program. Transfer procedures
have been established to ensure that cash will be in the DWSRF program
account within two days after the Agency receives a valid request for
cash draw from the State. To effect this two day transfer, the Agency
will only subject requests to account verification. The Agency will not
review DWSRF program documents (e.g., construction status of projects,
adequacy of voucher documentation) as part of the cash draw process.
Cash draws from the DWSRF-ACH are limited by the ceiling available
in the DWSRF-ACH. However, in the event of an imminent default (e.g.,
debt service payments to bondholders and resulting need for a cash draw
from a DWSRF-ACH for use as a security or guarantee), the Agency can
amend the grant agreement and payment schedule to allow the State to
draw cash immediately, up to the total amount of the DWSRF-ACH
committed to the guarantee or security. The DWSRF or the assistance
recipient must first incur a cost in order for cash to be drawn against
the DWSRF-ACH. The State may draw cash from the DWSRF-ACH for the
proportionate Federal share of eligible costs at the time those costs
have been incurred.
The following subsections describe the cash draw rules that apply
to the different types of assistance a Fund can provide.
a. Projects
i. Loans
The State may draw cash from the DWSRF-ACH when the Fund receives a
request from a loan recipient, based on incurred costs, including pre-
building and building costs.
ii. Refinance or Purchase of Municipal Debt
For completed construction, cash draws will be made at a rate no
greater than equal amounts over the maximum number of quarters that
capitalization grant payments are made, and up to the portion of the
DWSRF-ACH committed to the refinancing or purchase of the local debt.
Cash draws for incurred building costs will generally be treated as
refinanced costs. With the approval of the RA, the State may draw cash
immediately when it is prepared to refinance for up to five percent of
each fiscal year's capitalization grant or two million dollars,
whichever is greater, to refinance or purchase local debt.
For projects or portions of projects that have not been
constructed, the State may draw cash based on incurred construction
costs according to the rule for loans.
For the purchase of incremental disbursement bonds from local
governments, cash draws will be based on a schedule that coincides with
the rate at which construction related costs are expected to be
incurred for the project.
[[Page 59861]]
iii. Purchase of Insurance
The State may draw cash to purchase insurance as premiums are due.
iv. Guarantees and Security for Bonds
In the event of an imminent default in debt service payments on a
guaranteed or secured debt, the State can draw cash immediately up to
the total amount of the DWSRF-ACH that is dedicated to the guarantee or
security. If a balance remains after the default is covered, the State
must negotiate a revised schedule for the remaining amount dedicated to
the guarantee or security.
In the absence of default, the State can draw cash up to the amount
of the DWSRF-ACH dedicated for the guarantee or security based on
actual construction cost. The amount of the cash draw would be the
actual construction costs multiplied by the Federal share of the
reserve multiplied by the ratio of the reserve to either the amount
guaranteed or the proceeds of the bond issue.
In addition, in the case of a security, the State can identify a
group of projects whose value equals approximately the total of that
portion of the DWSRF-ACH and the State match dedicated as a security.
The State can then draw cash based on the incurred construction costs
of the selected projects only, multiplied by the ratio of the Federal
portion of the security to the entire security.
Where the cash draw rules discussed immediately above would
significantly frustrate a State's program, the Agency may permit an
exception to these cash draw rules and provide for a more accelerated
cash draw, where the State can demonstrate that:
There are eligible projects ready to proceed in the
immediate future with enough costs to justify the amount of the secured
bond issue;
The absence of cash on an accelerated basis will
substantially delay these projects;
If accelerated cash draws are allowed, the Fund will
provide substantially more assistance; and
The long term viability of the State program to meet water
quality needs will be protected.
When the ACH is used for securing State issued bonds, cash draws
cannot be made at a rate greater than equal amounts over the maximum
number of quarters that payments can be made. Exceptions to this
limitation are in cases of default and where cash draws are based on
construction costs for all projects.
b. Set-Asides
States may draw down federal funds for set-aside use without the
need to provide a State match in the form of cash (see V.A.). The one
exception is the required one-for-one match, where a State elects to
use up to 10 percent of the funds to be used for 1452(g)(2)(A-D). A
State must provide the match prior to or at the time the State requests
the federal funds, which is the same as the requirement for the 20
percent State match.
VI. Reporting/Review Responsibilities
Each State must submit a Biennial Report to the Administrator on
the State's activities which receive funding under section 1452.
The Administrator has determined that the Agency shall conduct
reviews of the DWSRF program on an annual basis. The Annual Review is
necessary to carry out the Agency's Federal fiduciary responsibilities
and to assure that States are implementing the program as efficiently
as possible (section 1452(g)(3)(A)). Specific elements of the Agency's
Annual Review are outlined below.
Several other programs may receive funding from the State's
allotment, including operator certification, small systems technical
assistance, source water protection, and wellhead protection. Agency
review of these other programs shall generally be conducted separately
in accordance with procedures described in program specific guidelines.
The Agency may develop additional guidelines to reflect new components
for the other eligible programs receiving funds pursuant to section
1452.
A. State Responsibilities
1. Biennial Report
The State should submit its Biennial Report to the RA according to
the schedule established in the grant agreement.
The Biennial Report should contain detailed information on how the
State has met the goals and objectives of the previous two fiscal years
as stated in the IUP and grant agreement. The Report should provide
information on loan recipients, loan amounts, loan terms, project
categories of eligible cost, and similar details on other forms of
assistance. This information should be provided in a format and a
manner that is consistent with the needs of the Regional Office. The
Report should also describe the extent to which the existing DWSRF
program financial operating policies, alone or in combination with
other State financial assistance programs, will provide for the long
term fiscal health of the Fund, attain and maintain compliance with the
Safe Drinking Water Act, and carry out other provisions specified in
the legislation.
The State must submit a detailed financial report as part of the
Biennial Report. At a minimum, the financial report shall include the
financial statements and footnotes required under GAAP to present
fairly the financial condition and results of operations.
In addition, the State must establish in its DWSRF program Biennial
Report that it has:
Reviewed all DWSRF funded projects in accordance with the
approved State Environmental Review Procedures;
Deposited its match (cash or State ACH) on or before the
date on which each grant payment was made;
Made binding commitments to provide assistance equal to
the Federal capitalization grant less set-asides funds plus the State
match funds within one year after receiving the grant payment, except
for FY 1997 (100%);
Managed the DWSRF program in a fiscally prudent manner and
adopted policies and processes which promote the long-term financial
health of the Fund(s);
Complied with Agency grant regulations (40 CFR part 31)
and specific conditions of the grant;
Complied with Federal cross-cutting authorities that apply
to the State as a Federal grantee and those which flow through to
assistance recipients;
Provided assistance only to eligible water systems and for
eligible purposes under these guidelines; and
Funded only the highest priority projects listed on the
IUP, according to their priority and readiness to proceed, and have
documented any procedures for by-passing priority projects on the IUP.
The State must provide, in the Biennial Report, all information
necessary to demonstrate that the State remains eligible to receive its
full allotment of funds provided under section 1452(m). Information on
the other eligible programs provided in the State's biennial DWSRF
program report shall not replace reporting requirements of other Agency
program-specific guidelines. At its option, the State may wish to
incorporate by reference or attach copies of the most recent copies of
other reports to the Agency describing progress under the other
eligible programs.
2. Annual Audit
The State must conduct an annual audit of the Fund, to be prepared
by the State or an independent auditor in accordance with the standards
of the
[[Page 59862]]
General Accounting Office (otherwise known as Generally Accepted
Government Auditing Standards). Set-aside monies used for projects, in
particular monies loaned out under section 1452(k)(1)(A), must also be
covered by a separate audit. Programmatic set-asides may be covered by
the Single Audit Act.
The audits must provide an auditor's opinion on the DWSRF financial
statements, a report on internal controls and a report on compliance
with laws and regulations. The audits may be conducted in conjunction
with audits conducted under the Single Audit Act. However, a State's
Single Audit report alone will not meet the DWSRF audit requirement.
Those set-asides that are not directly related to the revolving
fund should be audited under the guidelines of the Single Audit Act,
including OMB Circular A-133 and OMB's Compliance Supplement for Single
Audits of State and Local Governments.
3. Information Management System
In conjunction with the States, the Agency shall develop and
implement an information management system which includes regularly
updated data on funds available and assistance provided by the DWSRF
program. To the extent practical, this system will be coordinated with
the implementation of a similar effort in the CWSRF program. Once
developed, States will be required to provide information for the
information system. The Agency will use this information to assess the
program on a national basis and to monitor State progress in years in
which Biennial Reports are not required. In particular, the Regional
Offices will use the information to assist in conduct of the annual
reviews.
B. EPA Responsibilities
1. Annual Review of DWSRF Program
EPA will conduct annual reviews of each DWSRF program to assess the
success of each program in meeting the objectives of section 1452. The
purposes of the Annual Review are to (1) assess the success of the
State's performance of activities identified in the IUP, the State's
Biennial Report, the Operating Agreement (if used), and the DWSRF
program information management system, (2) determine how the DWSRF is
achieving the intent of section 1452 and the overall goals and
objectives of the SDWA as amended, (3) determine compliance with the
capitalization grant agreement, and (4) assess the financial status of
the Fund. The time period for conduct of Agency Annual Reviews is not
connected to the period of award of Federal capitalization grants
(i.e., Annual Reviews will continue even after Federal appropriations
are no longer available).
EPA will complete an Annual Review of the IUP and the Biennial
Report covering the same fiscal year according to the schedule
established in the grant agreement (generally within 60 days of receipt
of the Biennial Report in the year it is due, and approximately the
same date on the year the Biennial Report is not due). After reasonable
notice by EPA, the State or loan recipient shall make available to the
EPA such records as the EPA reasonably requires to review and determine
State compliance with the requirements of section 1452 of the SDWA as
amended in 1996. EPA may conduct on-site visits as needed to provide
adequate programmatic review. During years in which a State Biennial
Report is not required, the Region will, to the extent practicable,
obtain information necessary to conduct its Annual Review from the
DWSRF Information System. If necessary, the Region will request the
State to clarify information in the system or provide additional
information. Requests for such supplemental information shall be kept
to a minimum necessary for conduct of the Annual Review.
Upon completion of its Annual Review, the Region will prepare a
Program Evaluation Report (PER). The Region shall submit the draft PER
to the State for review and comment prior to preparing the final PER.
Identification and resolution of issues need not be limited to the
Annual Review process. As the Region becomes aware of issues in DWSRF
program operations, the Region shall consult with the State as
appropriate. EPA will review the adequacy of State program management
procedures and compliance with procedures as described in the State's
capitalization grant application and Operating Agreement (if used).
The following is a list of review topics which may be included as
part of the Annual Review:
Compliance/General Program Management
Compliance with capitalization grant conditions and EPA
grant regulations;
Compliance with the State assurances incorporated in the
capitalization grant agreement(s);
Consistency of DWSRF program operations with the State's
short and long term goals and objectives as reflected in the DWSRF
capitalization grant application(s) and grant agreements;
Coordination between the DWSRF program and other State
drinking water program management activities (e.g., source water
protection, wellhead protection, capacity development, assistance to
small systems);
Compliance with requirements of section 1452 (e.g.,
eligibility of recipients, types of projects, and types of financial
assistance provided);
Program administration costs; adequacy of staffing; and
Adequacy of State in filing timely ``UCC Financing
Statements'' to ensure security on loans to private systems.
Pace of Program
Status of binding commitments and progress in initiating
and completing projects;
Compliance with projections of Federal outlays and
adequacy of efforts to manage outlays, both for the current year as
well as the period covered by the Annual Review; and
Size of uncommitted fund balance.
Project Level Management
Compliance with cross-cutting Federal authorities;
Adequacy of State environmental review procedures
(including consideration of mitigation, consultation with appropriate
State and Federal environmental officials, and adequacy of project
documentation);
Adequacy of State procedures for reviewing assistance applicants'
financial (financial capability and credit analysis), managerial and
technical capabilities;
Adequacy of State procedures to review proposed dedicated
repayment sources and financial security demonstrations;
Adequacy of loan agreements (e.g., inclusion of assistance
terms; accounting, audit, and record keeping procedures; default
management provisions; and compliance with applicable State and Federal
requirements);
Adequacy of on-going State oversight of the financial,
managerial and technical capability of assistance recipients and
appropriateness of State actions to resolve areas of concern.
Consistency of assistance recipients with IUP (e.g., names
of recipients, assistance amounts, terms of assistance); and
Adequacy of construction management oversight (e.g.,
change orders, compliance with applicable labor laws, adherence to
schedule, record keeping).
[[Page 59863]]
Financial Management
Adequacy of State financial management system (including
documentation relating to Federal cash draws, deposit of State matching
funds, posting of repayments and interest earnings);
Timeliness of flow of funds to assistance recipients;
Adequacy of financial statement of the DWSRF program;
Adequacy of fund balance to meet financial
responsibilities (e.g., current operating expenses, debt service
payments, funding of reserves, long-term financial assistance needs);
Comparison of actual expenditures to budget;
Adequacy of State internal controls to prevent waste,
fraud and abuse (e.g., processing of payments, financial accounting);
Adequacy of loan portfolio management (including billing
and collections, aging of accounts, actions to prevent payment
default);
Repayment record, including defaults and potential for
defaults;
Mix and relative risk of financial assistance types (e.g.,
various interest rates, guarantees, refinancings, disadvantaged
community assistance);
Adequacy and reasonableness of State fund investment
practices;
Appropriateness of State policies and strategies with
respect to impacts on the long-term financial viability of the DWSRF
program;
Reasonableness of the disadvantaged community program and
consistency of its implementation with the approved program; and
Adequacy of the State's cash flow analysis, review of
financial trends, and long term forecasting of project assistance
needs.
2. Evaluation
The Administrator shall prepare an evaluation of the effectiveness
of the DWSRF programs' operations through FY 2003 (section 1452(r)).
3. Compliance Assurance
The Administrator will develop guidelines necessary to assure
effective program management and to prevent waste, fraud, and abuse
(section 1452(g)(3)). The Agency will assist the State in achieving and
maintaining compliance with program objectives and requirements. There
may be cases, however, when technical support may be insufficient or
where a State may be reluctant or unable to correct identified
problems. This section of the guidelines outlines procedures and
potential actions which may be necessary in cases of non-compliance.
If the annual review or audit reveals that the State has not
complied with its capitalization grant agreement or other requirements
under section 1452, or if the State does not manage the DWSRF program
in a financially sound manner (e.g., allows consistent and substantial
failures of loan repayments), the Agency may take action under the
enforcement provisions of the general grant regulations at 40 CFR
31.43.
Before taking such action the Agency will issue a notice of non-
compliance with the capitalization grant agreement and prescribe
appropriate corrective action. The State's corrective action must
remedy the specific instance of non-compliance and adjust program
management to avoid non-compliance in the future.
If within 60 days of receipt of the non-compliance notice, a State
fails to take the necessary actions to obtain the results required by
the EPA, or provide an acceptable plan to achieve the results required,
the Agency may suspend payments to the DWSRF until the State has taken
acceptable actions (40 CFR 31.43(a)(3)). Once the State has taken the
corrective action deemed necessary and adequate by the Agency, the
withheld payments shall be released and scheduled payments shall
recommence.
If the State fails to take the necessary corrective action deemed
adequate by the Agency within twelve months of receipt of the original
notice, any suspended payments may be deobligated and reallotted to
other States. All future payments may be withheld from a State (40 CFR
31.43 (a)(4)), and reallotted, until such time that adequate corrective
action is taken and the Administrator certifies that the State is back
in compliance.
4. Dispute Resolution
Any State applicant or recipient that has been adversely affected
by an Agency action or omission may request a review of such action or
omission. The procedures are codified in the Agency's general grant
regulations at 40 CFR part 31, subpart F.
VII. Appendices
A. Federal Cross-Cutters
Environmental Authorities
Archeological and Historic Preservation Act of 1974, Pub.
L. 86-523, as amended.
Clean Air Act, Pub. L. 84-159, as amended.
Coastal Barrier Resources Act, Pub. L. 97-348.
Coastal Zone Management Act, Pub. L. 92-583, as amended.
Endangered Species Act, Pub. L. 93-205, as amended.
Environmental Justice, Executive Order 12898.
Floodplain Management, Executive Order 11988 as amended by
Executive Order 12148.
Protection of Wetlands, Executive Order 11990.
Farmland Protection Policy Act, Pub. L. 97-98.
Fish and Wildlife Coordination Act, Pub. L. 85-624, as
amended.
National Historic Preservation Act of 1966, Pub. L. 89-
665, as amended.
Safe Drinking Water Act, Pub. L. 93-523, as amended.
Wild and Scenic Rivers Act, Pub. L. 90-542, as amended.
Economic and Miscellaneous Authorities
Demonstration Cities and Metropolitan Development Act of
1966, Pub. L. 89-754, as amended, Executive Order 12372.
Procurement Prohibitions under Section 306 of the Clean
Air Act and Section 508 of the Clean Water Act, including Executive
Order 11738, Administration of the Clean Air Act and the Federal Water
Pollution Control Act with Respect to Federal Contracts, Grants, or
Loans.
Uniform Relocation and Real Property Acquisition Policies
Act, Pub. L. 91-646, as amended.
Debarment and Suspension, Executive Order 12549.
Social Policy Authorities
Age Discrimination Act of 1975, Pub. L. 94-135.
Title VI of the Civil Rights Act of 1964, Pub. L. 88-352.
2
---------------------------------------------------------------------------
\2\ The Civil Rights Act and related anti-discrimination statues
apply to all the operations of the SRF program.
---------------------------------------------------------------------------
Section 13 of the Federal Water Pollution Control Act
Amendments of 1972, Pub. L. 92-500 (the Clean Water Act).
Section 504 of the Rehabilitation Act of 1973, Pub. L. 93-
112 (including Executive Orders 11914 and 11250).
The Drug-Free Workplace Act of 1988, Pub. L. 100-690
(applies only to the capitalization grant recipient).
Equal Employment Opportunity, Executive Order 11246.
Women's and Minority Business Enterprise, Executive Orders
11625, 12138 and 12432.
Section 129 of the Small Business Administration
Reauthorization and Amendment Act of 1988, Pub. L. 100-590.
Anti-Lobbying Provisions (40 CFR Part 30) (applies only to
capitalization grant recipients).
[[Page 59864]]
B. Criteria for Evaluating a State's Proposed NEPA-Like Process
The following criteria will be used by the RA to evaluate a
proposed SERP:
(A) Legal foundation. Adequate documentation of the legal
authority, including legislation, regulations or executive orders and/
or Attorney General certification that authority exists.
(B) Interdisciplinary approach. The availability of expertise,
either in-house or otherwise, accessible to the State Agency.
(C) Decision documentation. A description of a documentation
process adequate to explain the basis for decisions to the public.
(D) Public notice and participation.
(1) A description of the process, including routes of publication
(e.g., local newspapers and project mailing list), and use of
established State legal notification systems for notices of intent, and
criteria for determining whether a public hearing is required.
(2) The adequacy of a rationale where the comment period differs
from that under NEPA and is inconsistent with other State review
periods.
(E) Consider alternatives. The extent to which the SERP will
adequately consider:
(1) Designation of a study area comparable to the final system;
(2) A range of feasible alternatives, including the no action
alternative;
(3) Direct and indirect impacts;
(4) Present and future conditions;
(5) Land use and other social parameters including recreation and
open-space considerations;
(6) Consistency with population projections used to develop State
implementation plans under the Clean Air Act;
(7) Cumulative impacts including anticipated community growth
(residential, commercial, institutional and industrial) within the
project study area; and
(8) Other anticipated public works projects including coordination
with such projects.
C. Definitions
Administrative Expenses--Costs incurred in managing and operating
the SRF program. A State may use up to 4% of its allotment for program
administration expenses.
Annual Review--EPA's assessment of the success of a State DWSRF
program.
Appropriations--Statutory authority that, after apportionment by
OMB, allows Federal agencies to obligate funds and make payments from
the Treasury for specified purposes.
Assurances--Certifications or pledges by the State that it will
meet the requirements of the SDWA and other requirements of the
program.
Automated Clearing House--A Federal payment mechanism that
transfers cash to States and other recipients of Federal assistance
using electronic transfers from the Treasury through the Federal
Reserve System.
Biennial Report--The State's SRF Report to EPA which contains
information on how the State has met the goals and objectives of the
previous two fiscal years as stated in the Intended Use Plan and grant
agreement.
Bank/Banking--Crediting amounts (contributed by the State to SRF
eligible projects or activities) to the SRF in excess of amounts
required towards meeting certain requirements of future capitalization
grants.
Binding Commitment--A legal obligation by the State to a local
recipient that defines the terms and the timing for assistance under
the SRF.
Capitalization Grant--The assistance agreement by which EPA
obligates to award funds allotted to a State for purposes of
capitalizing that State's revolving fund and funds for other purposes
authorized in section 1452.
Capitalization Grant Application--An application for Federal
assistance submitted by a State, which in addition to the application
form includes an Intended Use Plan, proposed payment schedule, and
operating agreement or other documents describing how the State intends
to operate its SRF.
Certification/Certify--Documentation signed by the responsible
party that specific requirements or standards have been or will be met.
Community Water System--A public water system that: (a) Serves at
least 15 service connections used by year-round residents of the area
served by the system; or (b) regularly serves at least 25 year-round
residents.
Cross-Cutting Authorities--Federal laws and authorities that apply
by their own terms to projects or activities receiving Federal
assistance.
Debt Obligation--A legal obligation or liability to pay something
to someone else.
Default--Failure to meet a financial obligation such as a loan
payment.
Disadvantaged Community--The service area of a public water system
that meets affordability criteria established after public review and
comment by the State in which the public water system is located.
Disbursement--The transfer of cash from the SRF to the assistance
recipient.
Disbursement Schedule--A quarterly schedule of estimated
disbursements from the SRF.
Eligible System--Community water systems, both privately or
publicly owned, and nonprofit noncommunity water systems.
Environmental Review--An environmental review process conducted by
States that complies with 40 CFR Part 6, Subpart E or an alternative
``NEPA-like'' State environmental review.
Equivalency Projects--Projects that must total the amount equal to
the Federal capitalization grants and must comply with environmental
review requirements and Federal cross-cutting authorities.
Financial Health/Integrity--The ability of the DWSRF to address
SDWA needs and to be continually available to meet future needs.
Guarantee--A promise to provide municipal bondholders with full and
timely payment of principal and interest on the municipal debt
obligation to the limit of the guarantee, in the event of default by
the municipality.
Intended Use Plan--A document prepared each year by the State,
which identifies the intended uses of the funds in the SRF and
describes how those uses support the goals of the SRF.
Leveraging--The use of the capitalization grant as the security for
the sale of State bonds. Leveraging does not include State financing
arrangements in which repayment streams, rather than capitalization
grant or ACH are used as the primary security for the bond issue.
Loan--An agreement between the DWSRF and the local recipient
through which the SRF provides funds for eligible assistance and the
recipient promises to repay the principle sum back to the SRF over a
period not to exceed 20 years, except for disadvantaged communities
that may receive a loan for up to 30 years (that does not exceed the
life of the project), at an interest rate established at or below
market interest rates (may be interest free).
Net Bond Proceeds--The funds raised from the sale of the bonds
minus issuance costs (e.g., the underwriting discount, underwriter's
legal counsel fees, bond counsel fee, financial advisor fee, rating
agency fees, printing of disclosure documents/bond certificates,
trustee banks' fees, various forms of credit enhancement and other
costs that may be incurred by a State agency incidental to the bond
issuance).
Noncommunity Water System--A public water system that is not a
community system.
[[Page 59865]]
Noncompliance--Failure to satisfy the terms of the capitalization
grant agreement, including unmet assurances, invalid certifications, or
failure to manage the DWSRF in a financially sound manner.
Nonprimacy States--States that do not exercise primary enforcement
responsibility for public water systems.
Operating Agreement--An optional document in which the State may
establish the basic framework and procedures of the DWSRF that are not
expected to change annually.
Payment/Payment Schedule--A payment is an action by EPA to increase
the amount of funds available for cash draw in the Automated Clearing
House. A payment is not a transfer of cash to the State, but only an
authorization making funds available for transfer to the State when a
cash draw request is submitted. A payment schedule, indicating the
timing and size of the payments to be made, will be agreed upon by EPA
and the State based on the State's projection of binding commitments.
Refinancing--Purchase of a previously executed debt obligation
where initial debt was incurred and construction initiated after July
1, 1993.
Set-Aside--Use of allotted State funds for a range of specific SDWA
related activities identified in section 1452, to encourage source
water protection and other State drinking water program activities.
State Match--Funds equaling at least 20% of the amount of the
capitalization grants which the State must deposit into the Fund. The
State must also provide a 10% match if the State uses the 1452(g)(2)
set-aside.
Table 1.--State Requirements for the Capitalization Grant Agreement
----------------------------------------------------------------------------------------------------------------
Requirement How addressed
----------------------------------------------------------------------------------------------------------------
CG Application:
Part 31 Assurances (Grant Conditions).................. Agree to.
Established SRF & Instrumentality...................... Document (AG certif.).
Comply with State Statutes/Regulations................. Agree to.
Technical Capability To Manage Program................. Document.
Review Technical, Financial & Managerial Capability of Agree to.
Assistance Recipients.
Intended Use Plan (IUP):
(1) List of Projects............................... Propose.
(2) By-pass Procedures............................. Describe, if applicable.
(3) DWSRF Goals.................................... Describe.
(4) Activities To Be Supported..................... Describe.
(5) Disadvantaged Communities...................... Describe, if applicable.
(6) Assurances and Proposals:
--Environmental Review......................... Document/certify.
--Federal Cross-Cutters........................ Agree to.
--120% Binding Commitments..................... Agree to.
--Timely Expenditure........................... Agree to.
(7) Criteria & Method for Distributing Funds....... Describe.
Payment Schedule/Schedule of Estimated DWSRF Agree to and Propose.
Disbursements.
Other Activities To Be Supported by Set-Asides......... Intended Use Plan.
Transfer of Funds To/From CWSRF........................ Describe.
Grant Agreement:
Accept Grant payments.................................. Certify.
Deposit Funds in DWSRF Fund............................ Certify.
Deposit State Match:
--Source of the Match.............................. Identify.
--Deposit of Match................................. Certify.*
120% Binding Commitments............................... Agree to.
Information Management System.......................... Agree to.
Use State Laws & Procedures............................ Agree to.
Use GAAP (Generally Accepted Accounting Principles).... Agree to.
Use GAGAS (Generally Accepted Government Auditing Agree to.
Standards).
Recipient Accounting................................... Agree to.
Biennial Report........................................ Agree to.
Annual Audit........................................... Agree to.
Environmental Review **................................ Agree to.
Program Oversight...................................... Agree to.
All changes to the agreement or OA require a formal
grant amendment .
----------------------------------------------------------------------------------------------------------------
* For payments from FY 1997 appropriations, the State must agree to provide the certification no later than
September 30, 1999, of the availability of its match and provide the State match for grant payments already
received from the FY 1997 appropriations. A State that fails to certify by that date may not receive further
grant payments until the match is deposited.
** States required to certify environmental review process.
Table 2.--Set-asides and Funding Ceilings in the Drinking Water SRF
Program
------------------------------------------------------------------------
Before Allotment to States
------------------------------------------------------------------------
Programmatic
$10 Million.................. Health effects research.
$2 Million................... Unregulated contaminant monitoring
(starting in FY 1998).
Up to 2%..................... Technical assistance to small systems
(optional) Capped at $15 Million when
combined with funds appropriated under
Section 1442.
Undecided.................... Reimbursement of operator training
expenses projects.
[[Page 59866]]
Projects
1.5%......................... Indian Tribes/Alaska Native Villages.
------------------------------------------------------------------------
Based on Allotment to States
------------------------------------------------------------------------
Projects
1.0%......................... District of Columbia.
0.33%........................ Virgin Islands, Territories.
------------------------------------------------------------------------
After Allotment to States
------------------------------------------------------------------------
Programmatic
Up to 4%..................... Administration of DWSRF program and
technical assistance.
Up to 2%..................... Technical assistance to small systems.
Up to 10%.................... Assistance to State programs (PWSS, SWP,
capacity development, operator
certification.)
Up to 15%.................... Combination of the following: **
Loans for public water systems
to acquire land or conservation
easements.
Loans for community water
systems to implement SWP measures or to
implement recommendations in SW
petitions.
Technical and financial
assistance to public water systems for
capacity development.
Expenditures to delineate or
assess SWP areas.
Expenditures to establish and
implement wellhead protection programs.
**Each activity separately can receive
no more than 10% of the capitalization
grant amount.
Projects
Up to 30%.................... Loan subsidies for disadvantaged
communities.
------------------------------------------------------------------------
Based on Fund Amount
------------------------------------------------------------------------
Projects
Minimum 15%.................. Loans toward small systems (population
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