Order Code RS22037
Updated April 27, 2006
CRS Report for Congress
Received through the CRS Web
Drinking Water State Revolving Fund:
Program Overview and Issues
Mary Tiemann
Specialist in Environmental Policy
Resources, Science, and Industry Division
Summary
In the Safe Drinking Water Act (SDWA) Amendments of 1996 (P.L. 104-182),
Congress authorized a drinking water state revolving loan fund (DWSRF) program to
help public water systems finance infrastructure projects needed to comply with federal
drinking water regulations and to protect public health. Under the program, states
receive capitalization grants to make loans to water systems for drinking water projects
and certain other SDWA activities. Since the program was first funded in FY1997,
Congress has provided roughly $8.65 billion, including, in P.L. 109-54, $850 million
for FY2006, as requested. Through June 2004, the DWSRF program had provided $7.9
billion in assistance and had supported 6,500 projects.
The Environmental Protection Agency’s (EPA’s) 2003 survey of capital
improvement needs for public water systems found that water systems need to invest
$276.8 billion on infrastructure improvements over 20 years to ensure the provision of
safe water. This amount represents a 60% increase over the 1999 survey estimate of
$165.5 billion (in 2003 dollars) and reflects funds needed for compliance with several
new and pending regulations (e.g., the revised arsenic and radium rules), security-related
needs, and better reporting of needs for infrastructure rehabilitation and replacement.
Key issues include the gap between estimated needs and funding; SDWA compliance
costs, particularly for small systems; and the broader need for cities to improve their
water infrastructure, apart from SDWA compliance. This report will be updated.
The 104th Congress substantially revised the Safe Drinking Water Act with the 1996
SDWA amendments. A key new provision, Section 1452, authorized a drinking water
state revolving loan fund (DWSRF) program to help public water systems finance
improvements needed to comply with federal drinking water regulations and to address
the most serious risks to human health. The law authorizes EPA to make grants to states
to capitalize DWSRFs. States must match 20% of the federal grant and develop intended
use plans that indicate how allotted funds will be used. States may use the DWSRF to
provide loans and other assistance to eligible public water systems for expenditures that
EPA has determined will facilitate SDWA compliance or significantly further the Act’s
health protection objectives. Eligible projects include installation and replacement of
Congressional Research Service ˜ The Library of Congress

---

CRS-2
failing treatment facilities, distribution systems, and certain storage facilities. Projects to
replace aging infrastructure are eligible if they are needed to maintain compliance or to
further public health protection goals. Projects to consolidate water supplies also may be
eligible. This program is patterned after the 1987 Clean Water Act SRF (CWSRF)
program for financing municipal wastewater treatment projects.
Public water systems eligible to receive DWSRF assistance include community
water systems (whether publicly or privately owned) and not-for-profit noncommunity
water systems.1 States generally may not provide DWSRF assistance to systems that lack
the capacity to ensure compliance with the Act or that are in significant noncompliance
with SDWA requirements unless these systems meet certain conditions to return to
compliance. Systems owned by federal agencies are not eligible. Also, some states have
laws or policies that preclude privately owned utilities from receiving DWSRF assistance.
The 1996 law authorized appropriations for the DWSRF program of $599 million
for FY1994 and $1 billion for each of FY1995 through FY2003. Congress has provided
roughly $8.65 billion to date, including $1.275 billion for FY1997 (the first year for which
DWSRF authority was in place), $725 million for FY1998, $775 million for FY1999,
$820 million for FY2000, $825 million for FY2001, $850 million for FY2002, $850
million for FY2003 ($844.5 million after applying the mandatory across-the-board 0.65%
reduction in P.L. 108-7), $850 million for FY2004 ($844.9 million when adjusted for the
0.59% reduction under P.L. 108-199), and $850 million for FY2005 ($843.2 million after
the 0.8% reduction in P.L. 108-447, the Consolidated Appropriations Act, FY2005). For
FY2006, the President requested $850 million; in P.L. 109-54, Congress provided $850
million ($837.5 million after applying two rescissions). For FY2007, the President has
requested $841.5 million for the DWSRF program.
Through June 2004, EPA had awarded $5.74 billion in capitalization grants that,
when combined with the state match, bond proceeds, interest payments, and other funds,
amounted to $9.64 billion in DWSRF funds available for loans and other assistance.
Through this same period, total assistance provided by the program reached $7.9 billion
of the amount available, and 6,500 drinking water projects had received assistance.2
DWSRF Allotments and Set-Asides
EPA is required to allot DWSRF funds among the states based on the results of the
most recent quadrennial needs survey (discussed below). Each state and the District of
Columbia must receive at least 1% of available funds, and as much as 0.33% must be
made available for grants to the Virgin Islands, the Commonwealth of the Northern
Mariana Islands, American Samoa, and Guam. Before distributing funds among the states,
EPA sets aside from the annual DWSRF appropriation $2 million to pay for monitoring
1 A community water system is a system that serves at least 15 service connections used by year-
round residents or that regularly serves at least 25 year-round residents. Other public water
systems are noncommunity water systems (e.g., schools and workplaces with their own wells).
2 For a detailed discussion of program activities and issues, see the EPA Report to Congress The
Drinking Water State Revolving Fund Program, EPA 918-R-03-009, May 2003, available online
at [http://www.epa.gov/safewater/dwsrf.html#Facts].

---

CRS-3
of unregulated contaminants in small and medium water systems, and 1.5% for grants to
Indian Tribes and Alaska Native Villages ($12.65 million for FY2005). EPA is also
authorized to reserve annually up to $30 million to reimburse states for operator training
and certification costs if separate funding is not provided under Section 1419; EPA
reserved the full amount for several years, but reserved none since FY2003, as state
training programs matured. To provide technical assistance to small systems, EPA may
reserve up to 2%, with a $15 million cap; however, funding for this activity is provided
under Section 1442, and EPA has not set aside funds for this purpose.
The law also includes several set-asides and directives that apply to states. These
provisions offer states flexibility in tailoring their individual DWSRF programs to address
state priorities. They also demonstrate the emphasis that the 1996 amendments placed on
enhancing compliance, especially among smaller systems. The Act requires states to
make available at least 15% of their annual allotment for loan assistance to systems that
serve 10,000 or fewer persons, to the extent that the funds can be obligated to eligible
projects. The Act also allows states to use up to 30% of their DWSRF grant to provide
additional assistance, such as forgiveness of loan principal or negative interest rate loans,
to help economically disadvantaged communities (as determined by the state).
Among other optional set-aside provisions, states may reserve as much as 4% of their
DWSRF allotment to cover the costs of administering the DWSRF program and an
additional portion to help pay the costs of other mandates added by the 1996 law.
Specifically, states may set aside as much as 10% for a combination of the following:
public water system supervision programs, technical assistance through source water
protection programs, state capacity development strategies, and operator certification
programs. To use DWSRF funds for these purposes, states must match these expenditures
with an equal amount of state funds. States may use an additional 2% of funds to provide
technical assistance to systems that serve 10,000 or fewer persons. States also have the
option of using as much as 15% for a combination of the following: loans for the
acquisition of land or conservation easements; loans to implement voluntary source water
protection measures; technical and financial assistance to systems as part of a capacity
development strategy; and development and implementation of ground water protection
programs. Expenditures may not exceed 10% for any one of these activities. (In addition
to these set-asides, other SDWA provisions include specific authorizations of
appropriations for several of these programs and activities.)
To further enhance public water system compliance with drinking water regulations,
the 1996 amendments added new capacity development and operator certification
requirements. The law required EPA to withhold part of the DWSRF grant from states
that did not meet these mandates. Section 1420 required states to establish capacity
development programs that include (1) legal authority or other means to ensure that new
systems have the technical, financial, and managerial capacity to meet SDWA
requirements; and (2) a strategy to assist existing systems that are experiencing difficulties
in coming into compliance. If a state has not met these requirements, EPA is required to
withhold up to 20% of the state’s grant. In addition, states were required to adopt
programs for training and certifying operators of community and non-transient non-
community water systems, and EPA must withhold 20% of a state’s allotment if the state
does not met these requirements. Any funds withheld under each program would be
reallotted among states that have met the requirements for either capacity development
or operator certification.

---

CRS-4
Congress designed the DWSRF program to give states implementation flexibility.
Congress also gave states flexibility to set priorities between the SDWA and Clean Water
Act SRF programs to accommodate the divergent drinking water and wastewater needs
and priorities among the states. The law authorized states to transfer as much as 33% of
the annual DWSRF allotment to the CWSRF or an equivalent amount from the CWSRF
to the DWSRF. The statute authorized these transfers through FY2001. In October 2000,
EPA recommended that Congress continue to authorize transfers between the SRF
programs to give states flexibility to address their most pressing water infrastructure
needs. Subsequently, the conference reports for EPA’s appropriations have authorized
states to continue transferring funds between these programs.
Drinking Water Infrastructure Needs
SDWA section 1452(h) requires EPA to assess the capital improvement needs of
eligible public water systems and to report to Congress every four years. Concurrently
and in consultation with the Indian Health Service and Indian tribes, EPA must assess
needs for drinking water treatment facilities to serve Indian tribes (section 1452(I)). EPA
is required to distribute the DWSRF funds to the states based on the results of the latest
needs survey. Eligible systems include approximately 53,000 community water systems
and 21,400 not-for-profit noncommunity water systems.
EPA conducted its third survey of capital improvement needs for public water
systems in 2003.3 Based on this survey, EPA estimates that systems need to invest $276.8
billion on drinking water infrastructure improvements over 20 years to comply with
drinking water regulations and to ensure the provision of safe water. This amount exceeds
the 2001 needs survey estimate of $165.5 billion (in 2003 dollars) by more than 60%.
The 2003 survey includes funds needed for compliance with several recent regulations
(including the revised arsenic and radium rules) and pending rules for radon and other
contaminants. It also identified $1 billion in security-related needs. Also, water systems
made efforts to improve reporting of needs for infrastructure rehabilitation and
replacement, which EPA determined had been under-reported in the previous surveys.
Of the total national need of $276.8 billion, $160.5 billion (60%) is currently needed
to ensure the provision of safe drinking water. EPA notes that a “current need” typically
involves installing, upgrading, or replacing infrastructure to allow a system to continue
to deliver safe drinking water and that systems with current needs are usually not in
violation of a drinking water standard. EPA reports that, although all of the infrastructure
projects in the needs assessment promote the health objectives of the Act, $45.1 billion
(16%) of the total is attributable to SDWA regulations, while $237 billion (84%)
represents nonregulatory costs (e.g., routine replacement of basic infrastructure).
The survey presents the 20-year needs estimates by category: transmission and
distribution, treatment, source, storage, and other. The largest needs category, installation
and rehabilitation of transmission and distribution systems, accounts for $183.6 billion
(two-thirds) of total 20-year needs. Water treatment needs constituted the next largest
3 Environmental Protection Agency, Drinking Water Infrastructure Needs Survey and
Assessment: Third Report to Congress, June 2005. EPA 816-R-05-001. Available online at
[http://www.epa.gov/safewater/needs.html].

---

CRS-5
category, accounting for $53.2 billion of total needs, while water storage accounts for
$24.8 billion, and source (projects needed to obtain safe water supplies, including
rehabilitation and installation of wells) accounts for $12.8 billion of total 20-year needs.
For further perspective, the needs survey breaks down the 20-year needs estimates
according to system size and ownership. Large systems (serving more than 50,000 people)
account for $122.9 billion (%) of total 20-year need; medium systems (serving from 3,301
to 50,000 people) account for $103.0 billion; and small systems (serving 3,300 or fewer
people) account for $34.2 billion. Not-for-profit noncommunity water systems have
estimated needs of $3.4 billion. American Indian and Alaska Native Village water
systems have estimated 20-year needs of $1.3 billion and $1.2 billion, respectively.
EPA notes that the total needs estimate may be conservative for several reasons: (1)
systems are required to meet stringent documentation criteria when identifying needs; (2)
many systems did not fully understand their security needs at the time of the assessment;
(3) capital improvement plans often cover fewer than 10 years, while the survey tries to
capture 20-year estimates; and (4) the survey is limited to eligible needs, thus excluding
projects related to dams, raw water reservoirs, fire protection, and future growth.
Other needs assessments have also been prepared, including EPA’s 2002 Gap
Analysis. This study identified potential funding gaps between projected needs and
spending from 2000 through 2019. EPA estimated a potential 20-year funding gap for
drinking water capital and operations and maintenance ranging from $45 billion to $263
billion, depending on different scenarios.4 (For more information on this study and other
needs assessments, see CRS Report RL31116, Water Infrastructure Needs and
Investment: Review and Analysis of Key Issues, by Claudia Copeland and Mary Tiemann.)
Program Issues
With the authorization of the DWSRF program, Congress acted to help public water
systems finance the costs of infrastructure needed to achieve or maintain compliance with
SDWA requirements. While this federal/state program provides an important means for
addressing drinking water needs, a substantial gap remains between financing needs and
available funds. The 2003 needs survey identified $276.8 billion in drinking water
infrastructure needs over 20 years, while the DWSRF program was authorized at $9.6
billion over seven years. The appropriated amounts, augmented by the state match,
leveraging, repayments, and interest earnings, have created significant financing capacity
among the state DWSRFs. However, many expect a funding gap to persist, and new
SDWA requirements are expected to drive up future estimates of needs.
Other drinking water mandates eligible for DWSRF funding heighten competition
for these resources. The DWSRF program embraces competing objectives, and thus, this
competition is perhaps unavoidable. On the one hand, the fundamental purpose of the
program is to capitalize revolving funds in the states in order to generate a perpetual
source of funding for drinking water projects. On the other hand, Congress authorized
multiple set-asides to fund other drinking water program priorities and requirements, such
4 U.S. Environmental Protection Agency, Clean Water and Drinking Water Infrastructure Gap
Analysis Report, EPA 816-R-02-020, September 2002.

---

CRS-6
as system compliance capacity assurance, operator certification, and small system
technical assistance. Overall, states may use as much as 31% of their grant for the set-
asides and 30% to provide loan subsidies to economically disadvantaged communities.
While these options give states flexibility to tailor their programs to meet individual
needs, using funds for these activities could significantly erode the corpus of state funds
and slow the rate at which they become capitalized. A concern for states is that, to the
degree that Congress relies on the DWSRF to fund other SDWA requirements instead of
providing separate appropriations, the potential of the DWSRF program is diminished.
A separate issue is the need for communities to address drinking water infrastructure
needs that are outside the scope of the DWSRF program. Communities typically must
address several categories of infrastructure requirements unrelated to SDWA compliance
and, thus, ineligible for DWSRF assistance. These categories include future growth,
ongoing rehabilitation, and operation and maintenance of systems. EPA has reported that
outdated and deteriorated drinking water infrastructure poses a fundamental long-term
threat to drinking water safety, and that in many communities, basic infrastructure costs
could far exceed SDWA compliance costs. Although the DWSRF program does not
address certain categories of needs and excludes many noncommunity water systems from
coverage, with this program Congress has added a major tool to the mix of federal, state,
and local initiatives intended to help communities ensure the safety of water supplies.
In recent years, several committees have held hearings on the SRF programs,
infrastructure needs, and funding issues. In the 108th Congress, the Senate Environment
and Public Works Committee reported a water infrastructure financing bill. Infrastructure
needs and funding issues continue to receive attention in the 109th Congress. In July, the
Senate Environment and Public Works Committee ordered reported S. 1400, the Water
Infrastructure Financing Act. This bill would amend SDWA and the Clean Water Act to
reauthorize both SRF programs (authorizing $15 billion over five years for the DWSRF).
It also would direct EPA to establish grant programs for small or economically
disadvantaged communities for critical drinking water and water quality projects.
Companion bills, H.R. 2417 and S. 689, have been introduced to direct EPA to establish
a grant program to help eligible communities comply with drinking water standards, and
to provide enforcement flexibility in certain cases; the bills would authorize
appropriations of $1.9 million annually for six years.
Ongoing issues include the gap between drinking water infrastructure funding and
estimated needs; the growing cost of complying with SDWA standards, particularly for
small communities; the ability of small or economically disadvantaged communities to
afford DWSRF financing; and the broader need for cities to upgrade and expand
infrastructure unrelated to SDWA compliance. Despite congressional interest in recent
years, budgetary constraints have posed challenges to efforts to enact water infrastructure
funding legislation. In the face of large needs, scarce federal resources, and debate over
the federal role in funding water infrastructure, EPA, states, and utilities have been
examining alternative management and financing strategies to address costs and promote
greater financial self-reliance among water systems. Strategies include establishing
public-private partnerships, improving asset management, and adopting full-cost pricing
for water services. These approaches have their limits, particularly in poorer communities
and small water systems; thus, interest in increased infrastructure funding continues.

---