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Drinking Water State Revolving Fund
Program Guidelines: Part V, Part VI
FUNDING PROCESS
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:
- the monies were deposited in an SRF that subsequently received a
capitalization grant and, if the deposit was expended, it was
expended in accordance with section 1452 of the SDWA;
- 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
- 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.
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.
Federal Funding Process
- 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.
- 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.
- 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.
- 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.
- Projects
- 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.
- 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.
- Purchase of insurance
The State may draw cash to purchase insurance as premiums are due.
- 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.
- 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.
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.
State Responsibilities
- 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.
- 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 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.
- 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.
EPA Responsibilities
- 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).
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.
- Evaluation
The Administrator shall prepare an evaluation of the effectiveness of the
DWSRF programs' operations through FY 2003 (section 1452(r)).
- 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.
- 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.
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