Safe Drinking Water Act: State Revolving Fund Program

Order Code 97-677 ENR

Updated May 10, 2004

CRS Report for Congress

Received through the CRS Web

Safe Drinking Water Act:

State Revolving Fund Program

Mary Tiemann

Specialist in Environmental Policy

Resources, Science, and Industry Division

Summary

In the Safe Drinking Water Act (SDWA) Amendments of 1996 (P.L. 104-182),

Congress authorized a drinking water state revolving loan fund (DWSRF) program to

help public water systems finance infrastructure projects needed to comply with federal

drinking water regulations and to protect public health. Under this program, states

receive capitalization grants to make loans for drinking water projects and to support

certain other SDWA activities. The DWSRF program was authorized at $1 billion

annually through FY2003. Since the program was first funded in FY1997, Congress has

provided $6.94 billion, including $844.9 million for FY2004. Through June 2003, the

DWSRF program had provided $6.37 billion in assistance and supported 5,333 projects.

For FY2005, the Administration has requested $850 million for this program.

The Environmental Protection Agency’s (EPA’s) 2001 survey of capital

improvement needs for public water systems indicated that communities need to invest

$150.9 billion on drinking water infrastructure improvements over the next 20 years.

Interest in addressing infrastructure funding needs and related issues continues in the

108th Congress. Key issues include the gap between estimated needs and funding,

SDWA compliance and cost issues, particularly for small systems, and the availability

of funds for security improvements. Bills have been introduced to increase DWSRF

funding levels and to provide grants to small systems. This report will be updated.

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, authorized 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 address

the most serious risks to human health. The law authorizes EPA to make grants to states

to capitalize drinking water DWSRFs. States must match 20% of the federal grant and

develop intended use plans that indicate how allotted funds will be used. States may use

the DWSRF to provide loans and other assistance to eligible public water systems for

expenditures that EPA has determined will facilitate SDWA compliance or significantly

Congressional Research Service ˜ The Library of Congress

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further the Act’s health protection objectives. Eligible projects include installation and

replacement of failing treatment facilities, distribution systems, and certain storage

facilities. Projects to replace aging infrastructure are eligible if they are needed to

maintain compliance or to further public health protection goals. Projects to consolidate

water supplies also may be eligible. This program is patterned after the 1987 Clean Water

Act SRF (CWSRF) program for financing municipal wastewater treatment projects.

Public water systems eligible to receive 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. Also, some states have

laws or policies that preclude privately owned utilities from receiving DWSRF assistance.

The 1996 law authorized appropriations for the DWSRF program of $599 million

for FY1994 and $1 billion for each of FY1995 through FY2003. Congress has provided

roughly $6.94 billion to date, including $1.275 billion for FY1997 (the first year for which

DWSRF authority was in place), $725 million for FY1998, $775 million for FY1999,

$820 million for FY2000, $825 million for FY2001, and $850 million for FY2002, $850

million for FY2003 ($844.5 million after applying the mandatory across-the-board 0.65%

reduction to accounts funded in P.L. 108-7), and $850 million for FY2004 ($844.9 million

when adjusted for the mandatory 0.59% reduction under P.L. 108-199, the Consolidated

Appropriations Act for FY2004). The President has requested $850 million for FY2005.

Through June 2003, EPA had awarded more than $5 billion in capitalization grants

that, when combined with the state match, bond proceeds, interest payments and other

funds, amounted to $8.04 billion in DWSRF funds available for loans and other

assistance. Also through that period, more than 3,100 loans had been made, and 5,333

discrete projects had received assistance. Total assistance provided by the program

reached $6.37 billion.

DWSRF Allotments and Set-Asides

EPA is required to allot DWSRF funds among the states based on the results of the

most recent quadrennial needs survey (discussed below). Each state and the District of

Columbia must receive at least 1% of available funds, and as much as 0.33% must be

made 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 water systems and 1.5% for grants to

Indian Tribes and Alaska Native Villages (roughly $12.6 million for FY2003). EPA is

also authorized to reserve annually up to $30 million to reimburse states for operator

training and certification costs if separate funding is not provided under Section 1419;

EPA reserved the full amount for FY2001 and FY2002, and $29.4 million for FY2003.

1

A community water system is a system that serves at least 15 service connections used by yearround residents, or that regularly serves at least 25 year-round residents. Other public water

systems are noncommunity water systems, e.g., schools and workplaces with their own wells.

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Finally, EPA may reserve up to 2%, with a $15 million cap, to provide technical

assistance to small systems; however, funding for this activity is provided under Section

1442, and EPA has not set-aside SRF funds for this purpose. (For state allotments and setasides for FY2002 and FY2003, see [http://www.epa.gov/safewater/dwsrf/allot02.html].)

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

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 funds can be obligated to eligible projects.

The Act also allows states to use up to 30% of their DWSRF grant to provide additional

assistance, such as forgiveness of loan principal or negative interest rate loans, to help

economically disadvantaged communities (as determined by the state).

Among other optional set-aside provisions, 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 mandates added by the 1996 law.

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 funds for these purposes, states must match these expenditures

with an equal amount of state funds. States may use an additional 2% of funds 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; and development and implementation of ground water protection

programs. Expenditures may not exceed 10% for any one of these activities. (In addition

to these set-asides, other SDWA provisions include specific authorizations of

appropriations for several of these programs and activities.)

To further enhance public water system compliance with drinking water regulations,

the 1996 Amendments added new capacity development and operator certification

requirements. 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%, for FY1999 and beyond, for failure to obtain authority

to ensure that new systems have compliance capacity; and 10% in FY2001, 15% in

FY2002, and 20% in FY2003 for failure to adopt capacity development strategies. The

total amount withheld in any year for these purposes may not exceed 20%. In addition,

states were required to adopt programs for training and certifying operators of community

and non-transient non-community water systems, and since 2001, EPA must withhold

20% of a state’s allotment if the state does not met these requirements. Any funds

withheld under each program would be reallotted among states that have met the

requirements for either capacity development or operator certification.

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Congress designed the DWSRF program to give states implementation flexibility.

Congress also gave states flexibility to set priorities between the SDWA and Clean Water

Act SRF programs to accommodate the divergent drinking water and wastewater needs

and priorities among the states. The law authorized states to transfer as much as 33% of

the annual DWSRF allotment to the CWSRF or an equivalent amount from the CWSRF

to the DWSRF. The statute authorized these transfers through FY2001. In October 2000,

EPA recommended that Congress continue to authorize transfers between the SRF

programs to give states flexibility to address their most pressing water infrastructure

needs.2 Subsequently, the conference reports for EPA’s appropriations have authorized

states to continue transferring funds for between these programs.

Drinking Water Infrastructure Needs

The Act requires EPA to assess the capital improvement needs of eligible public

water systems and to report to Congress in 1997 and every four years thereafter.

Concurrently and in consultation with the Indian Health Service and Indian Tribes, EPA

must assess needs for drinking water treatment facilities to serve Indian Tribes. EPA is

required to distribute the DWSRF funds to the states based on the results of the latest

needs survey. Eligible systems include approximately 55,000 community water systems

and 21,400 not-for profit noncommunity water systems.

In February 2001, EPA issued the second needs survey which found that eligible

water systems need to invest $150.9 billion over 20 years (from 1999 through 2018).3 Of

this amount, $102.5 billion (68%) is currently needed to ensure the provision of safe

drinking water. EPA notes that a “current need” typically involves installing, upgrading,

or replacing infrastructure to allow a system to continue to deliver safe drinking water and

that systems with current needs are usually not in violation of a drinking water standard.

Of the total 20-year need, EPA further estimates that $31.2 billion is needed to comply

with existing SDWA regulations. Treatment for microbiological contaminants alone

accounts for $22.4 billion (72%) of the total regulatory need.

The survey also presented the 20-year needs estimates by category: transmission and

distribution, treatment, source, storage, and other. The largest needs category, installation

and rehabilitation of transmission and distribution systems, accounts for $83.2 billion

(more than half) of total 20-year needs. Water treatment needs constituted the next largest

category, accounting for $38.0 billion of total needs, while water storage accounts for

$18.4 billion, and source (projects needed to obtain safe water supplies including

rehabilitation and installation of wells) accounts for $9.6 billion of total 20-year needs.

For further perspective, the needs survey breaks down the 20-year needs estimates

according to system size and ownership. Large systems (serving more than 50,000 people)

account for $61.8 billion (41%) of total 20-year need; medium systems (serving from

3,301 to 50,000 people) account for $43.3 billion; and small systems (serving 3,300 or

2

Environmental Protection Agency. Implementation of Transfers in the Clean Water and

Drinking Water State Revolving Fund Programs. Report to Congress. October 2000. 41p.

Available at [http://www.epa.gov/safewater/dwsrf.html#Facts].

3

Environmental Protection Agency. Drinking Water Infrastructure Needs Survey: Second Report

to Congress. February 2001. Available at [http://www.epa.gov/safewater/needs.html].

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fewer people) account for $31.2 billion. Noncommunity water systems have estimated

needs of $3.1 billion. The survey indicates that American Indian and Alaska Native

Village water systems have estimated 20-year needs totaling $2.2 billion, of which $2.0

billion is needed currently to ensure the provision of safe drinking water. Estimates of

per-household need vary widely depending on system category and size. EPA estimates

that the 20-year need per household served by a large system averages $790. The 20-year

need rises to $1,250 for households served by medium systems, $3,000 for households

served by small systems, $6,500 for households served by American Indian systems, and

$51,500 for households served by Alaska Native systems.

EPA notes that the total need estimate is conservative for several reasons: 1) systems

were required to meet stringent documentation criteria when identifying needs; 2) many

systems could not identify all of their needs for the entire 20-year period (capital

improvement plans often cover only 1 to 5 years); and 3) the survey is limited to

estimating eligible needs, thus excluding capital projects related solely to dams, raw water

reservoirs, fire protection, and future growth.

Other needs assessments have also been prepared. In 2000, the Water Infrastructure

Network (WIN) (a coalition of state and local officials, water and wastewater service

providers, health and environmental groups and others) issued a report concluding that,

over the next 20 years, water and wastewater systems need to invest $23 billion annually

more than current investments to meet SDWA and CWA health and environmental

priorities and to replace aging infrastructure. In 2000, WIN and other groups presented

proposals for a multi-billion dollar investment program in water infrastructure. (For more

details, see CRS Report RL31116, Water Infrastructure Funding: Review and Analysis

of Current Issues.) In 2002, EPA issued The Clean Water And Drinking Water

Infrastructure Gap Analysis which identified potential funding gaps between projected

needs and spending from 2000 through 2019. This analysis estimated a potential 20-year

funding gap for drinking water capital and operations and maintenance ranging from $45

billion to $263 billion, depending on spending levels.4

Program Issues

With the authorization of the DWSRF program, Congress acted 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 most recent needs survey identified $150.9 billion in drinking water

infrastructure needs over 20 years, while the DWSRF program was authorized at $9.6

billion over seven years. The lower appropriated amounts, augmented by the state match,

leveraging, repayments, and interest earnings, have created significant financing capacity

among the state DWSRFs. However, many expect a funding gap to persist, and new

SDWA requirements are expected to drive up future estimates of needs.

Other drinking water mandates eligible for DWSRF funding 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

4

EPA’s Clean Water and Drinking Water Infrastructure Gap Analysis Report (EPA 816-R-02020) is available at [http://www.epa.gov/safewater/dwsrf.html#Facts].

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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 fund other drinking water program priorities and requirements, such

as system compliance capacity assurance, operator certification, and small system

technical assistance. Overall, states may use as much as 31% of their grant for the setasides and 30% 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, to the

degree that Congress relies on the DWSRF to fund other SDWA requirements instead of

providing separate appropriations, the potential of the DWSRF program is 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, ongoing rehabilitation, and operation and maintenance

of systems. EPA has reported that outdated and deteriorated drinking water infrastructure

poses a fundamental long-term threat to drinking water safety, and that in many

communities, basic infrastructure costs could far exceed SDWA compliance costs.

Although the DWSRF program does not address certain categories of needs and excludes

many noncommunity water systems from coverage, with this program Congress has added

a valuable tool to the mix of federal, state, and local initiatives intended to help

communities ensure the safety of their drinking water.

In the 107th Congress, several committees held hearings on the SRF programs,

infrastructure needs, and funding issues. The Senate Environment and Public Works

Committee reported S. 1961 to increase funding authority for the CWSRF and DWSRF

programs and to create a small system grant program. Congress also addressed security

issues facing the nation’s water infrastructure. The Bioterrorism Preparedness Act (P.L.

107-188) authorized funding for drinking water utilities to conduct vulnerability

assessments, prepare emergency response plans, and make basic security enhancements.

Additionally, EPA identified security measures that may be funded through DWSRFs.

(For more information, see CRS Report RL31294, Safeguarding the Nation’s Drinking

Water: EPA and Congressional Actions.)

Issues continuing in the 108th Congress include the gap between drinking water

infrastructure funding and estimated needs, small community funding and affordability

issues, and the availability of DWSRF and other funds for security measures. Congress

may continue previous efforts to enact legislation to expand financial assistance to public

water systems for drinking water infrastructure projects. However, in the current

budgetary environment, questions concerning the federal role in water infrastructure

funding could receive greater attention. Congressional committees also might explore

alternative approaches to helping communities improve their capacity to finance

infrastructure projects needed to comply with SDWA requirements and to meet other

needs. (For more information on congressional action, see CRS Issue Brief IB10118, Safe

Drinking Water Act: Implementation and Issues.)