Safe Drinking Water Act:
State Revolving Fund Program

Mary Tiemann
Specialist in Environmental Policy
Environment and Natural Resources Policy Division

Updated June 4, 1997

97-677 ENR

Drinking Water SRF Program

The 104th Congress substantially revised the Safe Drinking Water Act with the 1996 SDWA Amendments. A key new provision, Section 1452, authorizes a drinking water state revolving loan fund (DWSRF) program to help public water Systems finance improvements needed to comply with federal drinking water regulations and to promote better public health protection. The law authorizes EPA to make grants to states to capitalize drinking water DWSRFs. States may receive a capitalization grant if they establish a state loan fund, match 20% of the federal grant, develop an intended use plan that indicates how allotted fund will be used, and meet certain administrative and legal requirements. States may use the DWSRF to provide loan and grant assistance to eligible public water systems for expenditures that EPA has determined will facilitate SDWA compliance or significantly fritter the Act's health protection objectives. The new program is patterned after the Clean Water Act SRF program (CWSRF) authorized in 1987 for financing municipal wastewater treatment projects.

Public water systems that are eligible to receive drinking water DWSRF assistance include community water systems (whether publicly or privately owned) and not-for-profit noncommunity water systems.1 States generally may not provide DWSRF assistance to systems that lack the capacity to ensure compliance with the Act or that are in significant noncompliance with SDWA requirements unless these Systems meet certain conditions to return to compliance. Systems owned by federal agencies are not eligible for assistance. Also, some states have laws or policies that preclude privately owned utilities from receiving DWSRF assistance.

The 1996 Amendments authorized appropriations for the drinking water DWSRF program at a level of $599 million for FY 1994 and $1 billion annually for FY 1995 through FY2003. Congress appropriated $1 .275 billion for the program for FY 1997 (the first appropriation for which DWSRF authority was in place),2 and $725 million for FYI 998. The budget request for FY 1999 is $775 million.

DWSRF Allotments and Set-Asides

For FY 1997, EPA was required to allot DWSRF fund among the states using the formula for distributing state public water System supervision grants. (States receive these grants to help pay the costs of administering and enforcing the drinking water program.) For FY1998 and beyond, EPA must allot fund based on the results of the most recent quadrennial needs survey. Each state and the District of Columbia will receive at least 1% of available funds, and as much as 0.33% will be available for grants to the Virgin Islands, the Commonwealth of the Northern Mariana Islands, American Samoa, and Guam.

Before distributing funds among the states, EPA sets aside from the annual DWSRF appropriation $2 million to pay for monitoring of unregulated contaminants in small and medium Systems and 1.5% for grants to Indian Tribes and Alaska Native villages. Also, EPA is authorized to reserve annually up to $30 million to reimburse states for operator training and certification costs (if Congress does not provide sufficient funding for this activity under Section 1419). EPA may reserve up to 2%, with a $15 million cap, for providing technical assistance to small systems.3

The law also includes several set-asides and directives that apply to states. These provisions offer states flexibility in tailoring their individual DWSRF programs to address state priorities. They also demonstrate the emphasis that the 1996 Amendments place on preventing source water contamination and enhancing compliance, especially among smaller systems. The Act requires states to make available at least 15% of their annual allotment for loan assistance to Systems that serve 10,000 or fewer persons (to the extent the fund can be obligated to eligible projects). It also allows states to use up to 300/o of their DWSRF grant to provide additional assistance, such as forgiveness of loan principal, to help economically disadvantaged communities (as determined by the state).

Among other optional provisions (known as set-asides), states may reserve as much as 4% of their DWSRF allotment to cover the costs of administering the DWSRF program and an additional portion to help pay the costs of other new mandates added by the 1996 Amendments. Specifically, states may set aside as much as 10% for a combination of the following: public water system supervision programs, technical assistance through source water protection programs, state capacity development strategies, and operator certification programs. To use DWSRF fund for these purposes, states must match these expenditures with an equal amount of state funds. States may use an additional 2% of fund to provide technical assistance to systems that serve 10,000 or fewer persons. States also have the option of using as much as 15% for a combination of the following: loans for the acquisition of land or conservation easements, loans to implement voluntary source water protection measures; technical and financial assistance to systems as part of a capacity development strategy; delineations or assessments of source water protection areas (for FY1997 only); and development and implementation of ground water protection programs. Expenditures may not exceed 10% for any one of these activities (Other SDWA provisions include separate authorizations of appropriations for several of these programs.)

The 1996 Amendments added new capacity development and operator certification requirements to enhance public water system compliance with drinking water regulations. The law requires EPA to withhold part of the DWSRF grant from states that do not meet these mandates. Section 1420 requires states to establish capacity development programs that include: 1) legal authority or other means to ensure that new Systems have the technical, financial, and managerial capacity to meet SDWA requirements; and 2) a strategy to assist existing systems that are experiencing difficulties in coming into compliance. If a state has not met these requirements, EPA must withhold the state's grant as follows: 20% starting in FY 1999 for failure to obtain authority to ensure that new systems have compliance capacity; and 10% in 2001, 15% in 2002, and 20% in 2003 for failure to adopt capacity development strategies. The total amount withheld in any year for these purposes may not exceed 20%. (For FY1999, EPA is providing additional flexibility to allow states time to get their programs in place.) States also must adopt programs for training and certifying operators of community and non-transient non-community water systems, and EPA must withhold 20% of a state's allotment if the state does not met these requirements. This provision takes effect 2 years after EPA issues operator certification guidelines which must be published by February 6, 1999. Any withheld funds would be reallotted to those states that have met the respective requirements of these programs, either capacity development or operator certification.

Congress designed the DWSRF program to give states implementation flexibility. Congress gave states some additional flexibility to set priorities between the SDWA and Clean Water Act SRF programs to accommodate the different drinking water and wastewater needs and priorities among the states. The law allows a Governor to transfer as much as 33% of the annual DWSRF allotment to the CWSRF or an equivalent amount from the CWSRF to the DWSRF. These transfers are authorized until FY2002. Unlike the DWSRF funds, CWSRF funds may not go to privately owned utilities. To date, two states have indicated that they will transfer funds from the CWSRF to the DWSRF.

Drinking Water Infrastructure Needs

SDWA requires EPA to "conduct an assessment of water system capital improvement needs of all eligible public water systems in the United States" and to report to Congress by February 6,1997, and every 4 years thereafter. On the same schedule, EPA, in consultation with the Indian Health Service and Indian Tribes, must assess needs of drinking water treatment facilities to serve Indian Tribes. For FY 1998 and beyond, EPA is required to distribute DWSRF funds based on the results of the latest needs survey.

In January 1997, EPA presented to Congress the first drinking water needs survey which was based on a statistical sample of 4,000 community water Systems.4 The survey indicates that the nation's 55,000 community water Systems will need to invest $138.4 billion over the next 20 years to install, upgrade, or replace infrastructure to ensure the provision of safe drinking water to these systems' 243 million customers. Of this amount, an estimated $12.1 billion is needed now for treatment to comply with existing SDWA regulations; treatment for microbiological contaminants accounts for $10.2 billion (84%) of the current SDWA need.5 Another $14 billion will be needed for proposed regulations for controlling microbial contaminants and disinfection byproducts. The survey also indicates that $35.7 billion is needed to replace distribution pipes that pose a threat of coliform bacteria contamination and that, of this amount, $22.3 billion is needed now.6

The survey presents the 20-year needs estimates by category: transmission and distribution, treatment, source water protection, storage, and other. The largest needs category, installation and rehabilitation of transmission and distribution Systems, accounts for $77.2 billion (more than half) of total 20-year needs. Water treatment needs constitute the next largest category, accounting for $36.2 billion of total needs, while water storage accounts for $12.2 billion, and source water protection (rehabilitation and development) accounts for $11 billion of total 20-year needs.

The survey also breaks down the 20-year needs estimates according to system size and ownership. Large Systems (serving more than 50,000 people) account for $58.5 billion of total 20-year need; medium Systems (serving from 3,301 to 50,000 people) account for $41.4 billion; and small Systems (serving 3,300 or fewer people) account for $37.2 billion. American Indian and Alaska Native Systems have estimated 20-year needs totaling $1.3 billion, of which $1.1 billion is current need for improvements to drinking water systems.

Estimates of per-household need are provided, and these vary widely depending on System size and category. EPA estimates the 20-year need per household served by a large System to be roughly $970. The 20-year need increases to $1,200 for households served by medium systems, $3,300 for households served by small systems, $6,200 for households served by American Indian systems, and $43,500 for households served by Alaska Native systems.

EPA reports that the total need estimate is conservative because many systems could not identify all of their needs for the entire 20-year period. Other systems could not provide documentation for identified needs. Moreover, the needs survey excludes costs of pending regulations for radon and other radionuclides, arsenic, and sulfate. EPA estimates that these regulations could result in needs ranging between $1.7 billion and $14.8 billion but notes that more precise cost estimates were not yet available for these proposed rules.7 The survey also excludes needs estimates for eligible non-community water systems.8

"Total eligible need" for purposes of the allotment formula excludes certain projects that were counted in the needs survey but that are ineligible for DWSRF funding. Such projects include dams and reservoirs which account for roughly 3% of identified needs.

Status of State Programs

In February 1997, EPA released final guidelines for states to use in developing and administering the drinking water DWSRF program. States have moved quickly to establish their programs, facilitated in part by their prior experience with the CWSRF program. As of May 1998, all 50 states and Puerto Rico had established the necessary legislative authorities for participation in the DWSRF program, and EPA had awarded capitalization grants to 30 states worth a total of $621 million. As of April 1998, states had made loans to 114 public water systems worth a total of $186 million. The FY 1997 capitalization grants remain available through the end ofFYl998, and EPA anticipates that all states will receive their FYI 997 grants.

Program Issues

Issues for possible congressional oversight include DWSRF program implementation, the extent to which states use DWSRF funds for set-asides and non-loan purposes, the gap between drinking water infrastructure funding and needs, and remaining drinking water needs that are ineligible for the DWSRF program.

With the authorization of the DWSRF program, Congress moved to help public water Systems finance the costs of infrastructure needed to achieve or maintain compliance with SDWA requirements. While this federal/state program provides an important means for addressing drinking water needs, a substantial gap remains between financing needs and available funds. The first needs survey identified $138.4 billion in drinking water infrastructure needs over 20 years, while the DWSRF program is authorized at a level of $9.6 billion over 7 years. The authorized amount, if appropriated and augmented by the state match, leveraging, repayments, and interest earnings, would increase the financing capacity of state DWSRFs. However, a significant gap is likely to persist, and potentially costly pending regulations are expected to drive up future estimates of water system needs.

Additionally, various other SDWA mandates that are eligible for DWSRF funding will heighten competition for these resources. The DWSRF program embraces competing objectives, and thus, this competition is perhaps unavoidable. On the one hand, the fundamental purpose of the DWSRF program is to capitalize revolving funds in the states in order to generate a perpetual source of funding for drinking water projects. On the other hand, Congress authorized multiple set-asides to find other drinking water program priorities and requirements, such as source water protection, system compliance capacity assurance, and operator certification. Overall, states may use as much as 31% of their grant for the set-asides (and 300/o to provide loan subsidies to economically disadvantaged communities). While these options give states flexibility to tailor their programs to meet individual needs, using funds for these activities could significantly erode the corpus of state funds and slow the rate at which they become capitalized. A concern for states is that if Congress relies on the DWSRF to fund other SDWA requirements instead of providing separate appropriations, the effectiveness of the DWSRF program would be diminished.

A separate issue is the need for communities to address drinking water infrastructure needs that are outside the scope of the DWSRF program. Community water Systems typically must address several categories of infrastructure requirements unrelated to SDWA compliance and, thus, generally ineligible for DWSRF assistance. These categories include future growth, and ongoing rehabilitation, operation and maintenance of systems. In 1995, EPA reported that outdated and deteriorated drinking water infrastructure poses a fundamental long-term threat to drinking water safety in the United States, and that in many communities, basic infrastructure costs could far exceed SDWA compliance costs.

Although the DWSRF program does not address certain categories of water supply infrastructure needs and excludes many noncommunity water systems from coverage, with this program Congress has added a valuable new tool to the mix of federal, state, and local initiatives intended to help communities ensure the safety of their drinking water.

ENDNOTES

1 The Act defines a community water system as one that serves at least 15 service connections used by year-round residents, or that regularly serves at least 25 year-round residents. Other public water Systems are noncommunity water systems including, for example, schools, churches, and workplaces that have their own wells.

2 Congress had approved DWSRF funding for FY l994 ($599 million), FY1995 ($700 million), and FY1996 ($725 million), each time making the availability of these funds contingent upon enactment of authorizing legislation. The FYI 997 appropriation largely recaptured the previously approved, but forfeited, DWSRF funding for FYI 996. (For additional information, see CRS Report 96-647, Water Infrastructure Financing: History of EPA Appropriations.)

3 EPA will not provide funding for operator training and certification costs until this program is in place (EPA guidelines are due in February 1999). Other funding for small system technical assistance is provided in SDWA Section 1442, and the Administrator has determined that no additional set-aside funds are required at this time. (For amounts allotted to individual states, territories, and the District of Columbia, and set aside for Native Americans for FY1997 and FY 1998, see Internet website: [ http://www.epa.gov/OGWDW/allotmnt.html ].)

4 Environmental Protection Agency. Drinking Water Infrastructure Needs Survey: First Report to Congress January 1997. EPA 8l2-R-87-OOl. 42 p. plus appendices. Available at:
[ http://www.epa.gov/OGWDWIDWIdocs/needs ].

5 Ibid. Executive Summary. EPA defines current need as capital costs for projects needed now to ensure compliance with existing SDWA regulations.

6 EPA notes that the current need attributable to SDWA requirements is overstated because projects often include components that are not required for compliance but that are undertaken at the same time to realize savings in design and building costs. Moreover, a portion of estimated needs derives from state and local requirements and efforts to maintain water quality.

7 Drinking Water Infrastructure Needs Survey. Appendix C. p. C-1.

8 Roughly 19,000 of the 110,000 existing non-community water Systems are not-for-profit and eligible to receive assistance. EPA did not include estimates for these Systems because of resource constraints and because EPA's rough estimates indicate that the needs of these very small systems would not significantly affect the relative distribution of need among the states.