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Drinking Water State Revolving Fund Program Guidelines: Part V, Part VI


    1. 20 Percent State Match

      Except for FY 1997 funds, States must deposit the 20% State match into the Fund on the date of or before receiving payments under the capitalization grant. In general, State match deposits must be in cash. When a State opts to use a "letter of credit" mechanism for its State match, payments to this letter of credit account must be made proportionally on the same schedule as the payments of Federal funds (as outlined elsewhere in these guidelines) in the capitalization grant. Monies from this State match letter of credit must be drawn into the Fund as monies are drawn on the Federal letter of credit (known as the automated clearinghouse account (ACH)).

      When cash is drawn from the Federal ACH for the set-aside account only, the State may deposit its proportional share into the Fund in the form of a note receivable rather than actual cash. The note(s) must be converted to cash prior to the time when cash is drawn from the federal ACH to the project fund, in order to meet the State match requirement.

      For grant payments made to the State from funds appropriated in FY 1997, the State may defer deposit of its matching amount to no later than September 30, 1999. This flexibility is provided to States which may need additional time to secure State funding for the required matching amount. Note that even if the State defers deposit of its matching amounts, it must identify the source of its matching funds in the capitalization grant application and agree to provide the State match for grant payments already received from the FY 1997 appropriations by September 30, 1999. Thus, States will have to match the funds that have been received as payments or are drawn down in cash, in order to reach the proportional match requirement of 20%, before additional funds can be expended from the federal ACH.

      States may acquire the matching amount from a variety of sources, including legislative appropriations, proceeds from State issued bonds, revenues from State taxes or assessments, and funds maintained in other State accounts. Bonds issued by the State to derive the match may be retired from the interest payments made to the Fund on loans awarded by the Fund if the net proceeds from the State issued bonds are deposited in the fund. Loan repayments including principal and interest of a loan must be repaid to the Fund; with only the interest portion of repayments and interest earnings of the Fund as a source of funds to retire State bond issues that provide the State match. This flexibility to retire State debt should not be used to the extent that it endangers the long term financial goals and objectives, and financial condition of the DWSRF program, as described in the IUP. If the State provides a match in excess of the required amount, the excess balance may be banked toward match requirements associated with subsequent capitalization grants.

      The State may already manage a dedicated revolving fund which provides assistance for activities consistent with section 1452(a)(2) of the SDWA. The State may credit toward its match requirement State monies deposited into this dedicated fund between July 1, 1993 and prior to the receipt of a capitalization grant under section 1452(a) of the SDWA if:

      1. the monies were deposited in an SRF that subsequently received a capitalization grant and, if the deposit was expended, it was expended in accordance with section 1452 of the SDWA;

      2. the monies were deposited in a separate fund that has not received a capitalization grant, they were expended in accordance with section 1452 of the SDWA and an amount equal to all repayments of principal and payments of interest from these loans will be deposited in the Federally capitalized fund; or

      3. the monies were deposited in a separate fund and used as a reserve consistent with section 1452 and an amount equal to the reserve is transferred to the Federally capitalized fund as its function is satisfied.

    2. 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.

    3. Federal Funding Process

      1. General

        A State will receive each capitalization grant payment in the form of an increase to the ceiling of funds available through a separate Fund account set up in the EPA-Automated Clearing House (EPA-ACH). Cash will be transferred to the State from the U.S. Treasury on a reimbursement basis, after the assistance recipient has billed the DWSRF program for work completed and the DWSRF program requests reimbursement from EPA. The State then reimburses project assistance recipients for costs incurred -- a process known as the disbursement from the DWSRF.

      2. Schedule of payments

        A State must include a payment schedule in its capitalization grant agreement that is based on its projection of binding commitments (see below) and use of set-asides in the State's Intended Use Plan. Increases in the ceiling of funds available in the EPA-ACH will be made in accordance with the schedule of payments. All payments will be made by the earlier of 8 quarters from the date of a capitalization grant award or 12 quarters from the date of allotment. The schedule of payments applies to all funds in the capitalization grant, including those funds that are used for set-aside activities.

      3. Binding commitments

        In order to demonstrate continuing progress in project (both Fund and set-aside projects) initiation, and to further the intent of Congress to "commit(s) and expend(s) funds ... as efficiently as possible..." (section 1452(g)(3)(A)), the State must agree to enter into binding commitments to provide financial assistance under the DWSRF program with assistance recipients. A binding commitment is a legal obligation by the State to a recipient of assistance that defines the terms for DWSRF assistance. The binding commitment should include a description of the project to receive financial assistance, the expected terms of the assistance, and expected date of project initiation and project completion.

        Binding commitments must be made in an amount equal to the amount of each grant payment that is deposited into the Fund and State match within one year after the receipt of each grant payment.

        The State must continue to make progress in providing Fund assistance by entering into binding commitments equaling the amount of the grant payment and State match within one year after it receives a grant payment. To facilitate compliance with this requirement, the State may wish to plan for binding commitments equal to the federal capitalization grant less the non-project set-asides plus the State match (Federal funds only for the FY 1997 funds). Then, if some projects are unable to proceed for unforeseen reasons, the State will still be able to comply with the requirement. The State may make binding commitments for more than the required amount, and bank the "excess" balance towards the binding commitment requirements of subsequent grant payments.

        If a State is concerned about its ability to comply with the binding commitment requirement, it should notify the RA before it fails to fulfill its responsibility, and propose a revised payment schedule.

      4. Cash draw

        The ACH process is structured so that neither the DWSRF program nor the assistance recipients will be required to provide interim financing on financial transactions of the DWSRF program. Transfer procedures have been established to ensure that cash will be in the DWSRF program account within two days after the Agency receives a valid request for cash draw from the State. To effect this two day transfer, the Agency will only subject requests to account verification. The Agency will not review DWSRF program documents (e.g., construction status of projects, adequacy of voucher documentation) as part of the cash draw process.

        Cash draws from the DWSRF-ACH are limited by the ceiling available in the DWSRF-ACH. However, in the event of an imminent default (e.g., debt service payments to bondholders and resulting need for a cash draw from a DWSRF-ACH for use as a security or guarantee), the Agency can amend the grant agreement and payment schedule to allow the State to draw cash immediately, up to the total amount of the DWSRF-ACH committed to the guarantee or security. The DWSRF or the assistance recipient must first incur a cost in order for cash to be drawn against the DWSRF-ACH. The State may draw cash from the DWSRF-ACH for the proportionate Federal share of eligible costs at the time those costs have been incurred.

        The following subsections describe the cash draw rules that apply to the different types of assistance a Fund can provide.

        1. Projects

          1. 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.

          2. 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.

          3. Purchase of insurance

            The State may draw cash to purchase insurance as premiums are due.

          4. 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.

        2. 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.


    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.

    1. State Responsibilities

      1. Biennial Report

        The State should submit its Biennial Report to the RA according to the schedule established in the grant agreement.

        The Biennial Report should contain detailed information on how the State has met the goals and objectives of the previous two fiscal years as stated in the IUP and grant agreement. The Report should provide information on loan recipients, loan amounts, loan terms, project categories of eligible cost, and similar details on other forms of assistance. This information should be provided in a format and a manner that is consistent with the needs of the Regional Office. The Report should also describe the extent to which the existing DWSRF program financial operating policies, alone or in combination with other State financial assistance programs, will provide for the long term fiscal health of the Fund, attain and maintain compliance with the Safe Drinking Water Act, and carry out other provisions specified in the legislation.

        The State must submit a detailed financial report as part of the Biennial Report. At a minimum, the financial report shall include the financial statements and footnotes required under GAAP to present fairly the financial condition and results of operations.

        In addition, the State must establish in its DWSRF program Biennial Report that it has:

        • reviewed all DWSRF funded projects in accordance with the approved State Environmental Review Procedures;

        • deposited its match (cash or State ACH) on or before the date on which each grant payment was made;

        • made binding commitments to provide assistance equal to the Federal capitalization grant less set-asides funds plus the State match funds within one year after receiving the grant payment, except for FY 1997 (100%);

        • managed the DWSRF program in a fiscally prudent manner and adopted policies and processes which promote the long-term financial health of the Fund(s);

        • complied with Agency grant regulations (40 CFR Part 31) and specific conditions of the grant;

        • complied with Federal cross-cutting authorities that apply to the State as a Federal grantee and those which flow through to assistance recipients;

        • provided assistance only to eligible water systems and for eligible purposes under these guidelines; and

        • funded only the highest priority projects listed on the IUP, according to their priority and readiness to proceed, and have documented any procedures for by-passing priority projects on the IUP.

        The State must provide, in the Biennial Report, all information necessary to demonstrate that the State remains eligible to receive its full allotment of funds provided under section 1452(m). Information on the other eligible programs provided in the State's biennial DWSRF program report shall not replace reporting requirements of other Agency program-specific guidelines. At its option, the State may wish to incorporate by reference or attach copies of the most recent copies of other reports to the Agency describing progress under the other eligible programs.

      2. Annual audit

        The State must conduct an annual audit of the Fund, to be prepared by the State or an independent auditor in accordance with the standards of the General Accounting Office (otherwise known as Generally Accepted Government Auditing Standards). Set-aside monies used for projects, in particular monies loaned out under Section 1452(k)(1)(A), must also be covered by a separate audit. Programmatic set-asides may be covered by the Single Audit Act.

        The audits must provide an auditor's opinion on the DWSRF financial statements, a report on internal controls and a report on compliance with laws and regulations. The audits may be conducted in conjunction with audits conducted under the Single Audit Act. However, a State's Single Audit report alone will not meet the DWSRF audit requirement.

        Those set-asides that are not directly related to the revolving fund should be audited under the guidelines of the Single Audit Act, including OMB Circular A-133 and OMB's Compliance Supplement for Single Audits of State and Local Governments.

      3. Information management system

        In conjunction with the States, the Agency shall develop and implement an information management system which includes regularly updated data on funds available and assistance provided by the DWSRF program. To the extent practical, this system will be coordinated with the implementation of a similar effort in the CWSRF program. Once developed, States will be required to provide information for the information system. The Agency will use this information to assess the program on a national basis and to monitor State progress in years in which Biennial Reports are not required. In particular, the Regional Offices will use the information to assist in conduct of the annual reviews.

    2. EPA Responsibilities

      1. Annual review of DWSRF program

        EPA will conduct annual reviews of each DWSRF program to assess the success of each program in meeting the objectives of section 1452. The purposes of the Annual Review are to (1) assess the success of the State's performance of activities identified in the IUP, the State's Biennial Report, the Operating Agreement (if used), and the DWSRF program information management system, (2) determine how the DWSRF is achieving the intent of section 1452 and the overall goals and objectives of the SDWA as amended, (3) determine compliance with the capitalization grant agreement, and (4) assess the financial status of the Fund. The time period for conduct of Agency Annual Reviews is not connected to the period of award of Federal capitalization grants (i.e., Annual Reviews will continue even after Federal appropriations are no longer available).

        EPA will complete an Annual Review of the IUP and the Biennial Report covering the same fiscal year according to the schedule established in the grant agreement (generally within 60 days of receipt of the Biennial Report in the year it is due, and approximately the same date on the year the Biennial Report is not due). After reasonable notice by EPA, the State or loan recipient shall make available to the EPA such records as the EPA reasonably requires to review and determine State compliance with the requirements of section 1452 of the SDWA as amended in 1996. EPA may conduct on-site visits as needed to provide adequate programmatic review. During years in which a State Biennial Report is not required, the Region will, to the extent practicable, obtain information necessary to conduct its Annual Review from the DWSRF Information System. If necessary, the Region will request the State to clarify information in the system or provide additional information. Requests for such supplemental information shall be kept to a minimum necessary for conduct of the Annual Review.

        Upon completion of its Annual Review, the Region will prepare a Program Evaluation Report (PER). The Region shall submit the draft PER to the State for review and comment prior to preparing the final PER.

        Identification and resolution of issues need not be limited to the Annual Review process. As the Region becomes aware of issues in DWSRF program operations, the Region shall consult with the State as appropriate. EPA will review the adequacy of State program management procedures and compliance with procedures as described in the State's capitalization grant application and Operating Agreement (if used).

        The following is a list of review topics which may be included as part of the Annual Review:

        Compliance/General Program Management

        • Compliance with capitalization grant conditions and EPA grant regulations;
        • Compliance with the State assurances incorporated in the capitalization grant agreement(s);
        • Consistency of DWSRF program operations with the State's short and long term goals and objectives as reflected in the DWSRF capitalization grant application(s) and grant agreements;
        • Coordination between the DWSRF program and other State drinking water program management activities (e.g., source water protection, wellhead protection, capacity development, assistance to small systems);
        • Compliance with requirements of section 1452 (e.g., eligibility of recipients, types of projects, and types of financial assistance provided);
        • Program administration costs; adequacy of staffing; and
        • Adequacy of State in filing timely "UCC Financing Statements" to ensure security on loans to private systems.

        Pace of Program

        • Status of binding commitments and progress in initiating and completing projects;
        • Compliance with projections of Federal outlays and adequacy of efforts to manage outlays, both for the current year as well as the period covered by the Annual Review; and
        • Size of uncommitted fund balance.

        Project Level Management

        • Compliance with cross-cutting Federal authorities;
        • Adequacy of State environmental review procedures (including consideration of mitigation, consultation with appropriate State and Federal environmental officials, and adequacy of project documentation);
        • Adequacy of State procedures for reviewing assistance applicants' financial (financial capability and credit analysis), managerial and technical capabilities;
        • Adequacy of State procedures to review proposed dedicated repayment sources and financial security demonstrations;
        • Adequacy of loan agreements (e.g., inclusion of assistance terms; accounting, audit, and record keeping procedures; default management provisions; and compliance with applicable State and Federal requirements);
        • Adequacy of on-going State oversight of the financial, managerial and technical capability of assistance recipients and appropriateness of State actions to resolve areas of concern.
        • Consistency of assistance recipients with IUP (e.g., names of recipients, assistance amounts, terms of assistance); and
        • Adequacy of construction management oversight (e.g., change orders, compliance with applicable labor laws, adherence to schedule, record keeping).

        Financial Management

        • Adequacy of State financial management system (including documentation relating to Federal cash draws, deposit of State matching funds, posting of repayments and interest earnings);
        • Timeliness of flow of funds to assistance recipients;
        • Adequacy of financial statement of the DWSRF program;
        • Adequacy of fund balance to meet financial responsibilities (e.g., current operating expenses, debt service payments, funding of reserves, long-term financial assistance needs);
        • Comparison of actual expenditures to budget;
        • Adequacy of State internal controls to prevent waste, fraud and abuse (e.g., processing of payments, financial accounting);
        • Adequacy of loan portfolio management (including billing and collections, aging of accounts, actions to prevent payment default);
        • Repayment record, including defaults and potential for defaults;
        • Mix and relative risk of financial assistance types (e.g., various interest rates, guarantees, refinancings, disadvantaged community assistance);
        • Adequacy and reasonableness of State fund investment practices;
        • Appropriateness of State policies and strategies with respect to impacts on the long-term financial viability of the DWSRF program;
        • Reasonableness of the disadvantaged community program and consistency of its implementation with the approved program; and
        • Adequacy of the State's cash flow analysis, review of financial trends, and long term forecasting of project assistance needs.

      2. Evaluation

        The Administrator shall prepare an evaluation of the effectiveness of the DWSRF programs' operations through FY 2003 (section 1452(r)).

      3. Compliance assurance

        The Administrator will develop guidelines necessary to assure effective program management and to prevent waste, fraud, and abuse (section 1452(g)(3)). The Agency will assist the State in achieving and maintaining compliance with program objectives and requirements. There may be cases, however, when technical support may be insufficient or where a State may be reluctant or unable to correct identified problems. This section of the guidelines outlines procedures and potential actions which may be necessary in cases of non-compliance.

        If the annual review or audit reveals that the State has not complied with its capitalization grant agreement or other requirements under section 1452, or if the State does not manage the DWSRF program in a financially sound manner (e.g., allows consistent and substantial failures of loan repayments), the Agency may take action under the enforcement provisions of the general grant regulations at 40 CFR 31.43.

        Before taking such action the Agency will issue a notice of non-compliance with the capitalization grant agreement and prescribe appropriate corrective action. The State's corrective action must remedy the specific instance of non-compliance and adjust program management to avoid non-compliance in the future.

        If within 60 days of receipt of the non-compliance notice, a State fails to take the necessary actions to obtain the results required by the EPA, or provide an acceptable plan to achieve the results required, the Agency may suspend payments to the DWSRF until the State has taken acceptable actions (40 CFR 31.43(a)(3)). Once the State has taken the corrective action deemed necessary and adequate by the Agency, the withheld payments shall be released and scheduled payments shall recommence.

        If the State fails to take the necessary corrective action deemed adequate by the Agency within twelve months of receipt of the original notice, any suspended payments may be deobligated and reallotted to other States. All future payments may be withheld from a State (40 CFR 31.43 (a)(4)), and reallotted, until such time that adequate corrective action is taken and the Administrator certifies that the State is back in compliance.

      4. Dispute resolution

        Any State applicant or recipient that has been adversely affected by an Agency action or omission may request a review of such action or omission. The procedures are codified in the Agency's general grant regulations at 40 CFR Part 31, Subpart F.


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