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Drinking Water State Revolving Fund Program Guidelines: Part I

Introduction and Part I, Drinking Water State Revolving Fund Program Guidelines

United States
Environmental Protection
Office of Water
EPA 816-R-97-005
February 1997


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 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.


    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.

    DWSRF Program Structure

    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.

    1. 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 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:

        1. 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

        2. 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.

      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.)

    2. 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 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:

        1. address the most serious risk to human health;
        2. are necessary to ensure compliance with the requirements of this Title [SDWA] (including requirements of filtration); and
        3. 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 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.

    3. 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), 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.

    4. 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.

Table 1
State Requirements for the Capitalization Grant Agreement



Part 31 Assurances (Grant Conditions) Agree to
Established SRF & Instrumentality Document (AG certification)
Comply with State Statutes/Regulations Agree to
Technical Capability To Manage Program Document
Review Technical, Financial & Managerial Capability of Assistance Recipients Agree to
Intended Use Plan (IUP)
  1. List of Projects
  2. By-pass Procedures
  3. DWSRF Goals
  4. Activities To Be Supported
  5. Disadvantaged Communities
  6. Assurances and Proposals
    • Environmental Review
    • Federal Cross-Cutters
    • 120% Binding Commitments
    • Timely Expenditure
  7. Criteria & Method for Distributing Funds

Describe, if applicable
Describe, if applicable

Agree to
Agree to
Agree to
Payment Schedule/Schedule of Estimated DWSRF DisbursementsAgree to and Propose
Other Activities To Be Supported I by Set-AsidesIntended Use Plan
Transfer of Funds To/From CWSRF


Accept Grant payments Certify
Deposit Funds in DWSRF Fund Certify
Deposit State Match
  • Source of the Match
  • 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 Standards)Agree to
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 of Contents
Introduction and Section I
Section II
Section III and IV
Section V and VI
Section VII

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