Clean Water Act: Nine States' Experience With the Clean Water State Revolving Fund

Published by the Government Accountability Office on 1997-04-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on Water Resources and
                    Environment, Committee on Transportation and
                    Infrastructure, House of Representatives

For Release
on Delivery
Expected at
                    CLEAN WATER ACT
2 p.m. EDT
April 23, 1997
                    Nine States’ Experience
                    With the Clean Water State
                    Revolving Fund
                    Statement for the Record by
                    Stanley J. Czerwinski, Associate Director,
                    Environmental Protection Issues,
                    Resources, Community, and Economic
                    Development Division

    Mr. Chairman and Members of the Subcommittee:

    We appreciate the opportunity to present this statement for the record,
    which discusses selected states’ experience with the Environmental
    Protection Agency’s (EPA) Clean Water State Revolving Fund (SRF)
    Program. In 1987, the Congress authorized the creation of state revolving
    funds to help local governments and others construct projects to improve
    water quality and thereby help safeguard public health and the
    environment.1 All 50 states and Puerto Rico have established such
    revolving funds, and through fiscal year 1996, the Congress provided more
    than $11 billion to them.

    Through this program, the federal government provides annual grants to
    the states as “seed money” to help capitalize their revolving loan funds.
    The states use their revolving funds to make loans to local governments
    and others; as the loans are repaid, the funds are replenished, and
    additional loans can be made. In December 1996, we issued a report on
    nine states’ use of their revolving funds, including (1) the amount of funds
    lent and the percentage of available funds lent, as of the end of each state’s
    fiscal year 1996 and (2) information on factors at the federal and state
    levels that constrained the amount and percentage of funds lent.2 This
    statement is based on that report.

    In summary, we found:

•   The nine states increased the total amount of funds they lent from
    $3.3 billion in 1995 to $4.0 billion in 1996. All nine states increased the
    amount they lent by 15 percent or more, and three states achieved
    increases of 30 percent or more. In addition, seven of the nine states
    increased the percentage of available funds they lent. Of these seven, three
    states increased this proportion by 17 percentage points or more.
    Nevertheless, the percentage of funds lent as of the end of 1996 varied
    substantially among the nine states. Specifically, five states had lent
    80 percent or more of their available funds, three states had lent between
    70 and 79 percent, and one state had lent 60 percent.
•   In eight of the nine states, officials identified the expiration of the
    authorizing legislation, as well as federal requirements, as affecting the

     The program was established in the 1987 amendments to the Federal Water Pollution Control Act,
    also known as the Clean Water Act. It was authorized through 1994. Since then, the Congress has
    continued to fund the program with annual appropriations.
      Clean Water Act: State Revolving Fund Loans to Improve Water Quality (GAO/RCED-97-19, Dec. 31,

    Page 1                                                                       GAO/T-RCED-97-152
             amount and percentage of funds lent. For example, officials in seven states
             said the legislation’s expiration created uncertainty about the loan
             conditions that might apply in the future and caused some communities to
             postpone seeking or accepting loans. Also, officials in seven states said
             that other federal requirements—such as a prevailing-wage
             provision—discouraged some communities from seeking loans. Finally, in
             two states, officials said that state program decisions constrained lending.

             In 1972, the Congress established the Construction Grants Program to
Background   provide grants to help local governments construct wastewater treatment
             facilities. These federal grants provided most of the funding for these
             projects, with the remainder provided by the local government
             constructing the project. In 1987, the Congress began to phase out that
             program and authorized the creation of SRFs, which provide loans to local
             governments and others.

             The states are required to match SRF capitalization grants at a rate of at
             least one state dollar for every five federal dollars. The states have the
             option of increasing the amount of SRF funds available to lend by issuing
             bonds guaranteed by the money in the SRFs. According to a national
             survey, as of June 30, 1995 (the latest data available), the states
             collectively had $18.9 billion in their SRF accounts; over one-half of this
             amount (approximately $11 billion) was provided by federal capitalization
             grants.3 (The appendix provides additional information on the nine states’
             sources and uses of funds.)

             For the most part, the Congress gave the states flexibility to develop SRF
             loan assistance programs that meet their particular needs. However, the
             states must ensure that the projects funded with loans issued up to the
             amount of the federal capitalization grants meet two types of federal
             requirements. The first type includes those contained in the various
             statutes that apply generally to federal grant programs. These
             requirements—also called “cross-cutting” authorities—promote national
             policy goals, such as equal employment opportunity and participation by
             minority-owned businesses. The second type applies various provisions
             applicable to the Construction Grants Program (known as title II
             requirements because that program was authorized by title II of the

              Between 1992 and 1995, the Ohio State Water Development Authority annually surveyed all 50 states
             and Puerto Rico on certain aspects of the SRF program. See State Revolving Loan Fund Survey - 1995,
             Ohio Water Development Authority, Council of Infrastructure Financing Authorities Monograph No. 8,
             May 1996.

             Page 2                                                                       GAO/T-RCED-97-152
Federal Water Pollution Control Act Amendments of 1972).4 These include
compliance with the federal prevailing-wage requirement.5 The title II
requirements apply only to those projects wholly or partially built before
fiscal year 1995 with funds made directly available by federal capitalization

The transfer of federal funds to SRFs begins when the Congress
appropriates funds annually to EPA. EPA then allots capitalization grants to
the individual states, generally according to percentages specified in the
Clean Water Act.6 To receive its allotment, a state has up to 2 years to
apply for its capitalization grant. In order to apply, a state must, among
other things, propose a list of potential projects to solve water quality
problems and receive public comments on that list. After completing the
list and receiving its capitalization grant, a state generally has 2 years to
receive payments of the grant amount (via increases in its letter of credit).
After each such increase, a state has up to 1 year to enter into binding
commitments to fund specific projects. Next, a binding commitment is
typically converted into a loan agreement.

We collected detailed information on the use of revolving funds by nine
states with SRF programs—Arizona, Florida, Illinois, Louisiana, Maryland,
Missouri, Oregon, Pennsylvania, and Texas. We selected these states
because they provide diversity in terms of the size and complexity of their
SRF programs and other factors, such as geographic location. However, the
conditions in these states are not necessarily representative of the
conditions in all 51 SRFs.

We used a questionnaire and follow-up discussions to collect information
on SRF activities and finances from program officials from the nine states.
We also interviewed EPA headquarters and regional officials who are
responsible for the SRF program. We did not attempt to independently
verify the information collected from EPA or the states.

 For a more detailed description of the cross-cutting and title II requirements, see Water Pollution:
States’ Progress in Developing State Revolving Loan Fund Programs (GAO/RCED-91-87, Mar. 19, 1991).
 Federal law requires that workers on covered projects be paid the prevailing wage. The prevailing
wage is defined as the wage paid to the majority of the workers in the job classification on similar
projects in the same geographic area. For additional information on issues related to prevailing-wage
rates, see Davis-Bacon Act: Process Changes Could Raise Confidence That Wage Rates Are Based on
Accurate Data (GAO/HEHS-96-130, May 31, 1996).
 The 1987 amendments specified percentages for the 50 states, the District of Columbia, and seven
other jurisdictions. As some of these other jurisdictions—such as Palau—have gained independence
since 1987, they lost their entitlement to SRF funds. Their shares of the funds are allocated among the
states and other jurisdictions that remain eligible for funds.

Page 3                                                                           GAO/T-RCED-97-152
                      The data cited in this statement are as of the end of the applicable state’s
                      fiscal year or the federal fiscal year, as appropriate. In seven of the nine
                      states, the state fiscal year ends on June 30; in Texas, it ends on August 31;
                      and in Florida, it ends on September 30, which is also the end of the
                      federal fiscal year.

                      The overall amount of funds lent by the nine states increased between
Amount and            1995 and 1996, from $3.3 billion to $4.0 billion. The amount lent by each
Percentage of Funds   state also increased. During the same time period, seven states increased
Lent Generally        their percentage of funds lent, and two states maintained or decreased
                      their percentage of funds lent.7
                      All nine states increased the amount of funds they lent between 1995 and
                      1996. Six states increased their amount by 15 to 29 percent. For example,
                      Pennsylvania increased the amount lent by 17 percent, from $267 million
                      to $311 million. The other three states increased their amount of funds lent
                      by 30 percent or more. The largest change—95 percent—was in Arizona,
                      which increased from $50 million to $99 million.

                      Seven of the nine states increased their percentage of funds lent between
                      1995 and 1996. Three states increased their percentage by 17 percentage
                      points or more. Four other states increased theirs by 2 to 9 percentage
                      points. Finally, one state’s percentage stayed the same, and another state’s
                      declined by 2 percentage points.

                      Among the nine states, the percentage of funds lent at the end of 1996
                      ranged from 60 to 99 percent. Specifically, five states lent 80 percent or
                      more of their available funds, another three states lent 70 to 79 percent,
                      and the final state lent 60 percent.

                       It is possible for the amount of funds lent to increase, while the percentage of funds lent decreases (or
                      stays the same). This situation can occur when the increase in the amount of funds lent is
                      proportionately smaller than (or equal to) the increase in the available funds.

                      Page 4                                                                            GAO/T-RCED-97-152
                            Officials in eight of the nine states cited one or more factors at the federal
Lack of Legislative         level as affecting the amount and percentage of funds they lent. In seven
Reauthorization and         states, officials said that uncertainty about the reauthorization of the SRF
Other Federal-Level         program discouraged some potential borrowers. Also, in seven states,
                            officials cited a concern about compliance with federal requirements,
Factors Constrained         including possible increases in project costs because of a federal
Lending in Eight            prevailing-wage requirement. Finally, in three states, officials identified
                            other reasons, such as federal restrictions on the use of SRF funds.
Expiration of Legislative   Officials in seven of the nine states said that the lack of reauthorization of
Authorization Discouraged   the Clean Water Act limited their success in lending funds. Among other
Some Potential Borrowers    things, the lack of reauthorization made it difficult to assure the
                            communities applying for loans that SRF funds would be available to
                            finance their projects and created uncertainty among communities about
                            the terms of their loans.

                            Officials from the seven states generally agreed that the amount and
                            timing of federal funding became more uncertain after the SRF program’s
                            authorization expired at the end of September 1994. These officials said
                            that, prior to 1994, they used the amounts in the authorizing legislation to
                            help determine how much money they would have to lend each year.
                            According to these officials, these amounts also helped reassure the
                            communities that federal funding would be available for projects. These
                            officials said that the uncertainty created by the lack of reauthorization
                            made it difficult for states to schedule projects and assure the
                            communities applying for loans that construction money would be
                            available when needed.

                            In addition, Pennsylvania officials said that the lack of reauthorization
                            caused some communities to delay accepting SRF loans because they
                            hoped for more favorable loan terms after the act was reauthorized.
                            Specifically, the Congress has considered a proposal to extend the
                            maximum term for an SRF loan, in certain cases, from 20 years to as much
                            as 40 years and to provide lower interest rates. The state officials said that
                            the communities were interested in both longer repayment periods and
                            lower interest rates.8

                             In January 1992, we reported that the 20-year maximum term for SRF loans posed particular problems
                            for small communities. We reported that low-technology solutions, such as filtration ponds and
                            lagoons, which are often appropriate in small communities, generally have design lives extending far
                            beyond 20 years. Limiting the loan term increases the annual debt service payments, and hence user
                            charges, in communities that may not be able to afford higher charges. See Water Pollution: State
                            Revolving Funds Insufficient to Meet Wastewater Treatment Needs (GAO/RCED-92-35, Jan. 27, 1992).

                            Page 5                                                                       GAO/T-RCED-97-152
                        According to a Pennsylvania official, several communities in the state had
                        a loan approved by the state but had not formally accepted the loan. In
                        three cases, local officials told us that they were delaying further action
                        pending the act’s reauthorization; the total dollar value of the loans was
                        about $15 million. The Pennsylvania official told us that small, low-income
                        communities in particular would benefit from the proposal to lengthen the
                        repayment period. For example, in March 1995 Pennsylvania approved a
                        $3 million loan for Burrell Township, which has approximately 3,000
                        people. However, as of October 1996, the community had not accepted the
                        loan on the chance that a reauthorized act would provide for a longer loan
                        term and thus lower annual repayments.

The Federal             Officials in seven of the nine states said that compliance with the federal
Prevailing-Wage and     requirements made financing projects with SRF funds less attractive and, in
Related Requirements    some cases, caused communities to turn down SRF loans. In particular, five
                        states raised concerns that a federal prevailing-wage requirement could
Discouraged Potential   make SRF-financed projects more expensive to construct than projects
Borrowers               constructed with other funds. While the title II requirements—which
                        include the federal prevailing-wage requirement—ceased to apply to new
                        projects after October 1, 1994, state officials said they were concerned that
                        these requirements would be reinstated in the reauthorization act.

                        For example, an Arizona official said that the prevailing-wage requirement
                        could inflate a project’s costs from 5 to 25 percent. A Louisiana official
                        said that the community of East Baton Rouge Parish withdrew its 1990 SRF
                        loan application for a project to serve about 120,000 people when it
                        discovered that the prevailing-wage requirement would increase the labor
                        cost of the project by more than $1.1 million—31 percent.

                        Louisiana officials said that before the prevailing-wage requirement
                        expired, the state had experienced difficulties in making loans largely
                        because local officials perceived the requirement as increasing project
                        costs. The officials said that Louisiana’s lending rate increased in part
                        because the wage requirement expired. The state’s lending rate was
                        44 percent at the end of 1994, before the requirement expired; 62 percent
                        at the end of 1995; and 79 percent at the end of 1996.

                        EPA officials said they were aware that many states had a concern about
                        the prevailing-wage requirement. They noted, however, that the
                        requirement expired at the end of September 1994 and that the continued
                        application of the requirement would be a state’s management decision.

                        Page 6                                                     GAO/T-RCED-97-152
                           They also noted that, even before the requirement expired, it applied only
                           to projects funded with federal capitalization grants (as opposed to
                           projects funded solely with state matching or borrowed funds, for
                           example). Also, they noted that some states have chosen to continue
                           requiring projects to comply with the requirement, even though they are
                           no longer required to do so; however, they said, both Arizona and
                           Louisiana no longer apply the requirement to projects they fund.

Other Federal-Level        Officials from three states identified other factors at the federal level that
Factors Also Discouraged   constrained lending. These included the awarding of federal funds directly
Potential Borrowers        for selected communities and federal restrictions on the use of SRF funds.

                           Maryland and Pennsylvania officials said that the earmarking of federal
                           funds—not from the SRF program—for specific communities raised the
                           expectation in other communities that if they waited long enough, they
                           might also receive funds directly. This expectation reduced these
                           communities’ incentive to apply for an SRF loan.

                           For example, a Maryland official said that state SRF lending was limited by
                           a congressional decision to provide federal funds directly for a project in
                           Baltimore, which SRF officials had expected to finance. He said that the
                           City of Baltimore turned down the SRF loan because it received $80 million
                           in federal grant funds for the project in 1993 and 1994. The state official
                           said that it took time to find other communities to borrow the money that
                           was originally set aside for the Baltimore project. The state increased its
                           percentage of funds lent from 61 percent at the end of 1995 to 70 percent
                           at the end of 1996.

                           Officials from Missouri said that certain federal restrictions on the use of
                           SRF funds limit the amount of loans they can make. For example, a state
                           official cited restrictions on financing the costs of acquiring land. Under
                           the Clean Water Act, SRF loans cannot be made to purchase land unless the
                           land itself is an integral part of the waste treatment processes.9 Thus,
                           wetlands used to filter wastewater as part of the treatment process are an
                           eligible expense under the act. However, other lands, such as the land
                           upon which a treatment plant would be built, are not eligible. According to
                           the official, because purchasing land for a wastewater treatment facility
                           represents a large portion of the facility’s cost but is ineligible for SRF
                           financing, some communities are discouraged from seeking SRF loans.

                            In our January 1992 report (cited in the previous footnote), we reported that the ineligibility of certain
                           land costs for SRF assistance posed a financial problem for many communities.

                           Page 7                                                                             GAO/T-RCED-97-152
                        In Pennsylvania and Arizona, the amount of funds lent was limited by
States’ Management      decisions on how to manage the loan fund. These decisions related to how
Decisions Limited       to use SRF funds in Pennsylvania and how to publicize the program in
Lending in Two States   Arizona.

                        Pennsylvania established a state-funded program, independent of the SRF,
                        in March 1988 to help communities finance wastewater and other
                        projects.10 In the early years of the SRF program, Pennsylvania officials
                        decided to finance about $248 million in wastewater projects with these
                        state funds rather than wait for SRF funding to become available, according
                        to state officials. According to these officials, the state decided to fund
                        these projects as soon as possible with state funds to reduce public health
                        risks. For example, about $30 million was awarded to the City of
                        Johnstown to upgrade an existing treatment plant and thereby prevent raw
                        sewage overflows and inadequately treated wastewater from being
                        discharged into surface waters.

                        According to a state official, Pennsylvania’s percentage of funds lent
                        would have been higher if the state had chosen to fund the $248 million in
                        projects with SRF funds. In that case, he said, Pennsylvania’s total amount
                        of funds lent through the end of 1996 would have been $558 million,
                        instead of $310 million, and the state would have lent all available funds,
                        instead of 60 percent of those funds.

                        Likewise, in Arizona, state decisions limited the amount of funds lent.
                        According to a state official, efforts to inform local government officials
                        about the SRF program and interest them in participating were not effective
                        in the program’s early years. This difficulty was compounded by restrictive
                        provisions of state law that further limited the amount of SRF funds lent.11
                        The state official said that the outreach effort was refocused in 1995. He
                        also noted that the approval of changes in state laws in 1995 and 1996

                          Five of the other eight states also had grant and/or loan programs, namely, Illinois, Maryland,
                        Missouri, Oregon, and Texas. These programs ranged in size. For example, in 1995 the funding
                        available through Maryland’s program was approximately $1 million, while the funding available
                        through Illinois’ program was about $185 million.
                          Several provisions of Arizona State laws restricted some localities’ ability to participate in the SRF by
                        requiring that voters approve loan agreements and other means. According to a state official, largely
                        because of the marketing and legal factors, the state did not make any loans during 1993 and 1994. In
                        July 1994, EPA notified Arizona that it was not in compliance with the program’s regulations because it
                        had not entered into binding commitments to fund specific projects within a year of receiving its
                        payments. EPA required Arizona to take corrective action or face the loss of these grants. In response,
                        Arizona developed a corrective action plan, which EPA approved. Among other things, the plan
                        recommended several changes to the laws that limit local participation in the program. In 1995 and
                        1996, the Arizona State legislature approved many of the recommended changes. The state resumed
                        making loans in August 1995 and, according to an EPA official, was in compliance with the program’s
                        requirements in April 1996.

                        Page 8                                                                             GAO/T-RCED-97-152
helped create a more positive atmosphere for outreach, even before the
changes took effect. Arizona’s percentage of funds lent was 55 percent at
the end of 1995 and 81 percent at the end of 1996.

Page 9                                                    GAO/T-RCED-97-152
Appendix I

Sources of Funding and Amount of Funds
Lent, by State

                 Under the Clean Water State Revolving Fund (SRF) Program, the states use
                 funds from six primary sources to make loans for wastewater treatment
                 and related projects. These are:

             •   federal grants,
             •   state matching funds,
             •   borrowed funds,
             •   unused funds from the Construction Grants Program,
             •   repayments of loans, and
             •   earnings on invested funds.

                 All nine states received federal grants and provided state matching funds.
                 These two sources generally accounted for most of the money in the nine
                 states’ revolving funds. Four of the nine states borrowed money for their
                 revolving funds. Five states transferred unused funds from the old
                 Construction Grants Program. All nine states received some loan
                 repayments. Finally, eight states had investment earnings on loan

                 Table I.1 shows the amount and sources of funding for the nine states we
                 reviewed through each state’s fiscal year 1996.

                 Page 10                                                   GAO/T-RCED-97-152
                                           Appendix I
                                           Sources of Funding and Amount of Funds
                                           Lent, by State

Table I.1: Sources of Funding for Nine States, Through Fiscal Year 1996
Dollars in thousands
                          SRF grants                             Borrowed         ion Grants            Loan        Investment
State                       awarded State match                      funds          Program       repayments          earnings                    Total
Arizona                       $82,214          $12,559              $25,338                  0             $475             $444              $121,030
Florida                       376,183          102,010                      0        $67,558            47,591            57,946               656,441a
Illinois                      478,098           92,520                      0          24,900           77,610            10,200               683,328
Louisiana                     134,389           28,063                      0                0            4,126                  0             166,578
Maryland                      239,892           49,566              143,046                  0          12,717             9,052               454,273
Missouri                      298,550           59,710              216,072                681          79,340            11,026               665,379
Oregon                        124,033           20,399                      0                0          16,400             2,600               163,432
Pennsylvania                  390,178           83,276                      0           1,255           43,866             2,514               521,088
Texas                         528,078          144,284              554,352          197,502            86,871            21,988              1,533,075
Total                      $2,651,615     $592,387                $938,808          $291,896         $368,996          $115,770           $4,964,624
                                               Total includes $5,153,000 in administrative funds that did not fit in any of the categories.

                                           To determine the percentage of funds lent by each state as of the end of
                                           1995 and 1996, we divided the total amount of funds lent by the total funds
                                           available to lend, as defined above, both as of the end of the year. This
                                           method was based on the approach used by the Ohio Water Development
                                           Authority in conducting annual SRF surveys during 1992 through 1995.

                                           Table I.2 shows the amount and percentage of funds lent for the nine
                                           states for each state’s fiscal year 1995 and 1996.

                                           Page 11                                                                              GAO/T-RCED-97-152
                                      Appendix I
                                      Sources of Funding and Amount of Funds
                                      Lent, by State

Table I.2: Amount and Percentage of
Funds Lent, 1995 and 1996, by State                               Amount of funds lent
                                                                 (thousands of dollars)                 Percentage of funds lent
                                      State                             1995                1996                 1995                1996
                                      Arizona                        $50,500             $98,555                   55                    81
                                      Florida                        538,896             651,595                   99                    99
                                      Illinois                       529,000             614,000                   86                    90
                                      Louisiana                       91,173             131,983                   62                    79
                                      Maryland                       268,889             318,889                   61                    70
                                      Missouri                       461,973             531,368                   82                    80
                                      Oregon                          82,900             122,900                   57                    75
                                      Pennsylvania                   266,575             310,787                   53                    60
                                      Texas                        1,023,788           1,267,548                   81                    83
                                      Total                      $3,313,694          $4,042,207                    62                    80a
                                        The percentage shown is the median of the nine states’ individual percentages. We believe this
                                      is a better way to measure the various states’ experience than to calculate the cumulative
                                      average for the nine states, which would give greater weight to the states with large programs.

                                      Source: GAO’s analysis of data provided by the states.

(160397)                              Page 12                                                                       GAO/T-RCED-97-152
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