Drinking Water
Key Aspects of EPA's Revolving Fund Program Needed to Be Strengthened Gao ID: GAO-02-135 January 24, 2002The Environmental Protection Agency (EPA) estimates that $150 billion will be needed during the next 20 years to repair, replace, and upgrade the nation's 55,000 community water systems. Congress established the Drinking Water State Revolving Fund (DWSRF) program in 1996 to help communities finance the infrastructure projects needed to comply with federal drinking water regulations. EPA has developed a survey to collect data on the nature and cost of infrastructure improvements needed at local water systems. EPA has taken several steps to validate the data included in its $150 billion estimate, including visits to selected sites. However the agency has yet to calculate and report on the estimate's precision. GAO found that EPA is not taking full advantage of oversight tools to monitor states' implementation of the DWSRF. First, EPA is developing financial management and other measures to monitor state progress and support agency's review of state programs. Until these draft measures are finalized and applied consistently, their usefulness as an oversight tool will be limited. Second, the untimely and inconsistent preparation of program evaluation report reviews--one of EPA's primary oversight tools--has hampered the agency's ability to identify common or recurring problems. Third, gaps in the financial audit coverage and a limited review of the completed audits undermine EPA's ability to fully assess the financial conditions of the state's DWSRF programs.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-02-135, Drinking Water: Key Aspects of EPA's Revolving Fund Program Needed to Be Strengthened
This is the accessible text file for GAO report number GAO-02-135
entitled 'Drinking Water: Key Aspects of EPA‘s Revolving Fund Program
Need to Be Strengthened' which was released on January 24, 2002.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
United States General Accounting Office:
GAO:
Report to Congressional Requesters:
January 2002:
Drinking Water:
Key Aspects of EPA‘s Revolving Fund Program Need to Be Strengthened:
GAO-02-135:
Contents:
Letter:
Results in Brief:
Background:
Level of Precision Needed to Assess the Accuracy of EPA‘s Estimate:
States Have Made Limited Use of the Optional DWSRF Provision to Assist
Disadvantaged Communities:
EPA Is Not Taking Full Advantage of Its Oversight Tools to Monitor the
States‘ Implementation of the DWSRF Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Scope and Methodology:
Appendix I: Efforts to Determine the Universe of Water Systems Eligible
for DWSRF Disadvantaged Assistance:
Appendix II: GAO‘s Survey of State Drinking Water Officials Regarding
Assistance to Disadvantaged Communities;
Appendix III: Comments from EPA‘s Office of Water;
Appendix IV: Comments from EPA‘s Office of Inspector General;
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Types of Assistance Offered to Disadvantaged Communities, by
State, through December 31, 2000:
Table 2: Percentage of DWSRF Capitalization Grants Used for Subsidies
to Disadvantaged Communities, by State, through December 31, 2000:
Table 3: Scope of Independent Audit Reports Submitted to Inspector
General:
Figures:
Figure 1: Distribution of Estimated Infrastructure Needs, by System
Size:
Figure 2: Assistance to Disadvantaged Communities Under the DWSRF
Program, by State:
Abbreviations:
DWSRF: Drinking Water State Revolving Fund:
EPA: Environmental Protection Agency:
NIMS: National Information Management System:
OIG: Office of Inspector General:
PER: Program Evaluation Review:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
January 24, 2002:
The Honorable W. J. (Billy) Tauzin:
Chairman, Committee on Energy and Commerce:
House of Representatives:
The Honorable Paul E. Gillmor:
Chairman, Subcommittee on Environment and Hazardous Materials:
Committee on Energy and Commerce:
House of Representatives:
The Environmental Protection Agency‘s (EPA) most recent national
survey of drinking water infrastructure needs estimates that $150.9
billion will be needed over the next 20 years to repair, replace, and
upgrade the nation‘s 55,000 community water systems to protect public
health.[Footnote 1] To help communities finance the infrastructure
projects needed to comply with federal drinking water regulations and
protect public health, the Congress established the Drinking Water
State Revolving Fund (DWSRF) program in 1996. So far, states have
cumulatively received over $4 billion to establish revolving loan funds
to finance improvements at local drinking water systems. On an annual
basis, DWSRF appropriations account for about 10 percent of EPA‘s
budget at current funding levels.
Under the 1996 amendments to the Safe Drinking Water Act (SDWA), EPA
is required to conduct an assessment of water systems‘ capital
improvement needs every 4 years. To this end, EPA developed a survey to
collect data on the nature and cost of infrastructure improvements
needed at local water systems. EPA designed its survey to provide a
high level of precision for the estimated drinking water infrastructure
needs. Specifically, EPA set precision targets such that its national
and state-level estimates would have a 95 percent likelihood of falling
within 10 percent of the actual need.
To establish the DWSRF, the 1996 amendments authorized $9.6 billion, to
be appropriated through 2003. In its annual budgets, EPA requests
appropriations to capitalize the states‘ funds and then makes specific
allotments, or capitalization grants, to each state for that purpose.
The states use the grants to make low-interest loans to their local
water systems for improvements that are needed to comply with federal
drinking water regulations and protect public health. As the loans are
repaid, the states‘ funds are replenished, enabling them to make loans
to other eligible drinking water projects. To help meet the needs of
communities that qualify as ’disadvantaged,“ states may extend loan
repayment periods or use an amount equal to up to 30 percent of their
annual capitalization grants to provide additional subsidies to these
communities, such as offering principal forgiveness.
Given the size and significance of the DWSRF program, the 1996
amendments and EPA‘s implementing regulations include provisions to
develop tools, such as information systems, performance reviews, and
financial audits, to help EPA monitor the states‘ implementation of the
DWSRF program and evaluate program effectiveness. For example, when EPA
promulgated its DWSRF regulations, it established a national
information management system (NIMS) to better assess the DWSRF
program, monitor state progress, and provide assistance in the agency‘s
annual reviews of state programs. EPA also set up a process whereby its
regional offices annually assess key aspects of state DWSRF programs:
achievement of state program goals and objectives; compliance with
grant agreements and applicable statutory provisions, such as funding
priorities; and the program‘s financial status. To determine the
adequacy of the financial controls in the DWSRF program, EPA‘s
regulations provide that states may voluntarily agree to conduct annual
independent audits that cover the financial statements, internal
controls, and compliance with applicable requirements. States that do
not conduct their own audits are subject to periodic audits by the EPA
Office of Inspector General (OIG).
Concerned about the adequacy of federal, state, local, and private
resources to meet local drinking water infrastructure needs, you asked
us to examine three aspects of the DWSRF program: (l) the accuracy of
EPA‘s needs assessment estimate; (2) the extent to which states use the
optional provision for assisting disadvantaged communities; and (3)
EPA‘s efforts to monitor states‘ implementation of the DWSRF program.
To address the first objective, we analyzed certain aspects of the
methodology that EPA used to derive its drinking water needs estimate,
specifically the impact of sampling on the estimate‘s precision. For
the second objective, we surveyed all 50 states to determine how states
use DWSRF funds to assist disadvantaged communities. For the third
objective, among other things, we conducted a content analysis of the
reports on EPA‘s Program Evaluation Reviews (PER)”one of the principal
oversight tools that EPA uses to monitor the states‘ compliance with
DWSRF program requirements.
Results in Brief:
EPA has taken a number of steps to validate the data included in its
$150.9 billion estimate of the nation‘s drinking water infrastructure
needs, such as conducting site visits to selected systems and asking
states to review supporting documentation. However, EPA and other users
of the needs assessment cannot get a sense of the estimate‘s accuracy”
how closely the estimate reflects actual needs”until EPA calculates and
reports the estimate‘s level of precision. Although EPA set a target
for the precision of its estimate, without calculating the level of
precision actually achieved, EPA cannot determine whether it met, or
fell short of, this target. Because the survey‘s results influence the
level of congressional appropriations for the DWSRF and, more
importantly, form the basis for EPA‘s allotment of these funds to the
states, we are recommending that EPA calculate and report the level of
precision actually achieved in its recent needs assessment, and
determine what implications, if any, its findings have on the
methodology used to conduct future needs assessment surveys.
Thirty-one states have established programs as part of their DWSRF to
assist disadvantaged communities, according to the results of our 50-
state survey. Of the states with programs, 21 provided about $94
million in special subsidies”mainly principal forgiveness”and 23
offered extended loan terms. While criteria for defining disadvantaged
communities vary, states typically use some measure of household water
rates relative to a community‘s median household income. In addition,
states reported that other factors, such as concerns about depleting
the fund and the availability of assistance from other federal and
state sources, influenced their decisions to offer DWSRF assistance to
disadvantaged communities.
EPA is not taking full advantage of the oversight tools that are
currently available to monitor states‘ implementation of the DWSRF
program. First, EPA is using its national drinking water information
management system to develop financial management and other measures to
monitor state progress and support the agency‘s review of state
programs; however, until these draft measures are finalized and
consistently applied, their utility as an oversight tool is limited.
Second, the untimely and inconsistent preparation of PER reports”one of
EPA‘s principal oversight tools”hamper its ability to use the reports
to identify common or recurring problems. Finally, gaps in the
financial audit coverage, and a limited review of the audits that are
performed, hamper EPA‘s ability to fully assess the financial condition
of the states‘ DWSRF programs. We are recommending several actions to
improve EPA‘s use of available oversight tools to monitor states‘
implementation of the DWSRF program.
We provided a draft of our report to EPA for its review and comment.
EPA generally agreed with our recommendations and offered technical
clarifications, which we incorporated, as appropriate. In addition, we
restated the basis for our recommendation for EPA to calculate and
report the level of precision actually achieved in its needs assessment
survey.
Background:
EPA is required to conduct an infrastructure needs assessment every 4
years to estimate the future capital investment needs of drinking water
systems eligible for DWSRF assistance.[Footnote 2] EPA‘s assessment is
designed to include ’infrastructure needs that are required to protect
public health, such as projects to preserve the physical integrity of
the water system, convey treated water to homes, or ensure continued
compliance with specific Safe Drinking Water Act regulations.“[Footnote
3] EPA‘s most recent needs survey estimates that $150.9 billion will be
required from private and public sources over the next 20 years to
finance drinking water infrastructure projects. About 80 percent of the
total need ($119.7 billion) is linked to projects involving the
installation, upgrade, and replacement of the basic infrastructure
needed to deliver safe drinking water to the public. The rest of the
need”$31.2 billion, or about 20 percent”will go to projects directly
associated with regulatory compliance, including $21.9 billion for
compliance with existing regulations and $9.3 billion related to
proposed or recently issued regulations, such as those for arsenic and
radon.
While the smallest water systems represent over 80 percent of all
community water systems, they account for only about 22 percent of the
total estimated infrastructure needs. In contrast, the largest water
systems represent about 2 percent of the community systems and account
for the nearly 44 percent of total needs. Figure 1 shows infrastructure
needs, by system size.
Figure 1: Distribution of Estimated Infrastructure Needs, by System
Size:
[Refer to PDF for image]
This figure is a pie-chart depicting the following data:
Distribution of Estimated Infrastructure Needs, by System Size:
Large community water systems (serving over 50,000 people): 43.6%;
Medium community water systems (serving 3,301 to 50,000 people): 30.6%;
Small community water systems (serving 3,300 or fewer people): 22%;
Other: 3.7%.
Notes: The analysis does not include the costs associated with proposed
or recently promulgated Safe Drinking Water Act regulations, which are
estimated to be $9.3 billion in total.
The ’Other“ category includes the needs associated with not-for-profit
noncommunity water systems and American Indian and Alaska Native
Village systems.
Source: Drinking Water Infrastructure Needs Survey Second Report to
Congress, U.S. Environmental Protection Agency (February 2001), p.12.
[End of figure]
Subsidized loan assistance is an integral part of the DWSRF program in
that the interest rates that states offer to local water systems must
be at or below the current market rate.[Footnote 4] In addition, the
Congress has authorized states to use an amount equal to up to 30
percent of their DWSRF capitalization grants to provide additional
subsidies to communities that meet state-defined affordability criteria
and thus qualify as ’disadvantaged.“[Footnote 5] States with
disadvantaged community programs may opt to forgive a portion of the
loan principal or issue a loan at a negative interest rate. States also
have the option of extending the loan repayment period from the
standard 20 years to up to 30 years, provided that the repayment period
does not exceed the expected design life of the project.
The 1996 amendments and EPA‘s regulations contain provisions that
address EPA‘s role in ensuring that states effectively implement the
DWSRF program. For example, when EPA promulgated its DWSRF regulations,
it established an information management system to collect specific
information on how states‘ DWSRF moneys are being spent. EPA also set
up a process whereby its regional offices annually (1) assess the
success of the states‘ performance of activities identified in their
intended use plans[Footnote 6] and other reports submitted to EPA and
(2) determine compliance with requirements in the law, applicable
regulations, and the grant agreement. To determine the adequacy of the
financial controls in the DWSRF program, the 1996 amendments required
EPA to periodically audit state loan funds. Accordingly, EPA‘s
regulations mandate state compliance with the provisions of the Single
Audit Act.[Footnote 7] EPA‘s regulations further provide that states
may voluntarily agree to conduct annual independent audits that cover
financial statements, internal controls, and compliance with applicable
requirements. States that do not conduct their own independent audits
are subject to periodic audits by the EPA Office of Inspector General
(OIG).
Level of Precision Needed to Assess the Accuracy of EPA‘s Estimate:
EPA has taken a number of steps to ensure the validity of the
information in its needs estimate, such as conducting site visits to
selected systems and asking states to review supporting documentation.
However, while the agency set a target for the precision of its
estimate, it did not determine how close it came to actually achieving
its target. As a result, EPA and other users of the needs assessment
cannot get a sense of the extent to which EPA‘s estimate reflects
actual needs, particularly with regard to how the total needs are
apportioned among the 50 states.
EPA Took Steps to Validate Its Data, but Did Not Calculate or Report a
Level of Precision When Estimating the Nation‘s Drinking Water
Infrastructure Needs:
EPA has taken a number of steps to ensure that the information it
collected about infrastructure needs at local water systems”and the
cost of addressing those needs”was accurate. For example, EPA sent a
questionnaire to large and medium-sized systems to collect information
on capital projects needed to protect the public health. EPA surveyed
100 percent of the largest water systems (defined, for this purpose, as
those serving populations of more than 40,000) and a statistical sample
of medium-sized systems, which amounted to about one-third of the
systems serving populations between 3,300 and 40,000. According to
EPA‘s report to the Congress,[Footnote 8] the water systems were asked
to:
* describe each project and provide documentation explaining why it is
needed;
* indicate whether the project would address a current or future need,
involves installing new or rehabilitating existing infrastructure, and
is triggered by a SDWA regulation; and;
* provide a cost estimate along with related documentation or the
project‘s design capacities so that EPA could use a model to estimate
the costs.
For the smallest water systems, EPA decided that collecting data
through site visits by trained water systems specialists would provide
better information than using the questionnaire approach, because small
systems generally lack the data and personnel to complete a
questionnaire of this type. EPA selected a statistical sample of about
600 small water systems for these site visits.
In addition to the documentation requirements, EPA arranged for each
questionnaire response to be reviewed by cognizant state officials to
ensure that systems thoroughly identified and correctly documented
their needs. In its February 2001 report to the Congress, EPA reported
that about 14 percent of the 86,057 projects submitted had been
eliminated because the documentation criteria had not been met or the
project appeared to be ineligible for DWSRF assistance.[Footnote 9]
In the case of the large and medium-sized systems, EPA obtained
information from a sufficient number of systems to estimate
infrastructure needs on a state-by-state basis. However, EPA officials
explained that the agency did not have the resources to send
specialists to enough small systems to get an accurate picture of needs
on a state-level basis. Specifically, EPA estimated that it would have
to conduct site visits at approximately 22,000 small water systems to
collect enough data to estimate needs on a state-by-state basis.
Therefore, EPA used the results from its site visits to small systems
to calculate a national-level estimate of small system infrastructure
needs and then apportioned the total among the states on the basis of
each state‘s small systems, categorized by population served and type
of water source.
In conducting its needs assessment, EPA‘s goal was to provide
’statistically precise“ estimates of the infrastructure needs in each
state. For the large and medium-sized systems, which typically comprise
the majority of a state‘s needs, EPA set a precision target of plus or
minus 10 percent, at the 95 percent confidence level. The target
represented a 95 percent likelihood that the actual or ’true“ need for
a particular state fell within 10 percent of the amount estimated.
Similarly, for the small water systems, the precision target of the
national-level estimate was set at plus or minus 10 percent, at the 95
percent confidence level.
In an effort to assess the accuracy of EPA‘s needs estimate, we
performed a limited review of the methodology EPA used to derive its
drinking water needs estimate, particularly the impact of sampling on
the estimate‘s precision, and determined that EPA probably did not
achieve the intended level of precision. We found some indications that
the actual level of uncertainty, or sampling error, [Footnote 10] was
higher than EPA‘s target, possibly by a considerable amount. For
example, although EPA was able to use data from its 1995 survey in
determining the sample size for its 1999 survey, use of these data
biased its calculations. Specifically, the agency‘s approach did not
account for the fact that it extensively used average costs estimated
from models when calculating its sample size.[Footnote 11] The practice
of using average costs understated the extent that costs varied from
one system to the next. Furthermore, estimating highly variable costs
typically requires a larger sample size than is required in situations
with limited cost variability. Therefore, EPA‘s sample sizes were
probably too small, and it is likely that EPA did not collect data from
enough systems to achieve its precision target.
Another indication that EPA did not meet its precision target
specifically concerns the estimate for small system needs. Even though
EPA‘s technical experts believed that a simple random sample[Footnote
12] would be required to achieve the intended precision target, EPA
deviated from this sampling methodology in two important ways. First,
taking into account the prohibitive travel costs associated with
visiting 600 randomly selected systems located throughout the country,
EPA instead used statistical sampling to select 100 geographical areas
and then chose six systems within each area. Although an acceptable
approach, such a statistical sampling technique can require a
considerably larger sample size than when simple random sampling is
used to achieve the desired level of precision. However, EPA did not
increase its sample size to account for the change in sampling
technique, which could have adversely affected the sampling error.
Second, based on recommendations from an advisory workgroup,[Footnote
13] EPA intentionally selected at least one area in each of the 50
states, Puerto Rico, and the U.S. Virgin Islands. Such geographical
constraints had the potential to increase the sampling error, thereby
reducing the level of precision of EPA‘s estimate.
EPA‘s Needs Assessment Serves as the Basis for DWSRF Allotments to the
States:
The 1996 amendments to the Safe Drinking Water Act require EPA to use
the results of its most recent needs assessment survey to allocate the
amount of each state‘s annual DWSRF allotment. According to EPA, its
periodic surveys are intended to provide statistically precise
estimates of need for each of the states. Then, EPA allocates the DWSRF
funds on the basis of each state‘s share of the total national need,
except that each state receives a minimum share of 1 percent.
Although EPA has calculated and reported the actual precision levels
for other surveys, EPA officials told us that doing so for the drinking
water needs assessment would not be worthwhile, because it would not
affect the allocation of DWSRF funds to the states. In addition,
according to an EPA official responsible for managing the periodic
needs surveys, EPA has already invested approximately 4 years and $3.6
million to implement its most recent assessment and summarize the
results. The official said that calculating the actual precision of the
cost estimates would cost at least an additional $30,000 to $40,000.
Moreover, actually achieving the precision target could further
increase the agency‘s costs, depending on how many additional site
visits were needed. However, a number of leading survey research
associations advocate for the calculation and reporting of the
precision level to fully inform users of a sample‘s limitations.
[Footnote 14] Furthermore, by knowing the precision level of the
estimate a user can better judge the estimate‘s accuracy. Given EPA‘s
investment in the survey thus far”and the billions of dollars that will
ultimately be allotted to the states”the benefits of determining the
estimate‘s precision level appear to outweigh the projected costs.
States Have Made Limited Use of the Optional DWSRF Provision to Assist
Disadvantaged Communities:
According to the results of our 50-state survey, 31 states have
established programs as part of their DWSRF to assist disadvantaged
communities. Of these 31 states, 21 provided about $94 million in
special subsidies”mainly principal forgiveness”and 23 offered extended
loan terms through December 31, 2000.[Footnote 15] While criteria for
disadvantaged communities vary, states typically use some measure of
household water rates relative to a community‘s median household
income. In addition, several factors influence states‘ decisions to
offer DWSRF assistance to disadvantaged communities, such as concerns
about depleting the fund and the availability of assistance from other
federal and state sources.
Thirty-One States Offer DWSRF Assistance to Disadvantaged Communities:
Thirty-one states have adopted a disadvantaged community program and
offer assistance in the form of loan subsidies”that is, forgiving a
portion of the loan principal or issuing a loan at a negative interest
rate”or extended loan terms.[Footnote 16] As of December 31, 2000, 25
of these states had actually provided assistance to qualified
communities. Three of the 19 states that did not have disadvantaged
community programs reported plans to offer such assistance as part of
their DWSRF programs within the next 3 years. Figure 2 shows DWSRF
assistance to disadvantaged communities, by state.
Figure 2: Assistance to Disadvantaged Communities Under the DWSRF
Program, by State:
[Refer to PDF for image]
This figure is a map of the United States depicting Assistance to
Disadvantaged Communities Under the DWSRF Program, in the following
three categories:
States that offer and have provided special assistance (25):
Alaska;
Arizona;
Arkansas;
California;
Delaware;
Florida;
Georgia;
Illinois;
Maine;
Maryland;
Michigan;
Minnesota;
Montana;
Nebraska;
New York;
Oregon;
Pennsylvania;
South Carolina;
South Dakota;
Texas;
Utah;
Vermont;
Virginia;
Washington;
West Virginia.
States that offer but have not provided special assistance (6):
Idaho;
Kentucky;
Nevada;
New Hampshire;
New Mexico;
Tennessee.
States without a disadvantaged community program (19):
Alabama;
Colorado;
Connecticut;
Hawaii;
Indiana;
Iowa;
Kansas;
Louisiana;
Massachusetts;
Mississippi;
Missouri;
New Jersey;
North Carolina;
North Dakota;
Ohio;
Oklahoma;
Rhode Island;
Wisconsin;
Wyoming.
Note: Colorado, Ohio, and Rhode Island reported that they plan to adopt
disadvantaged community programs within the next 3 years.
Source: GAO‘s survey of 50 state drinking water programs.
[End of figure]
Most States with Disadvantaged Community Programs Offer Principal
Forgiveness or Extended Loan Terms:
Most states that have a disadvantaged community program offer principal
forgiveness or extended loan terms for capital improvement projects.
States rarely offer negative interest rate loans to disadvantaged
communities because, according to state DWSRF officials, they find this
option difficult to explain to local communities and difficult to
administer. Table 1 shows the type of assistance available to
disadvantaged communities, by state.
Table 1: Types of Assistance Offered to Disadvantaged Communities, by
State, through December 31, 2000:
State: Alaska;
Number of loan agreements with one or more types of assistance: 10;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Empty].
State: Arkansas;
Number of loan agreements with one or more types of assistance: 7;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Arizona;
Number of loan agreements with one or more types of assistance: 1;
Principal forgiveness: [Check];
Negative interest rate loans: [Check];
Extended loan terms: [Check].
State: California;
Number of loan agreements with one or more types of assistance: 10;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Delaware;
Number of loan agreements with one or more types of assistance: 1;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Florida;
Number of loan agreements with one or more types of assistance: 20;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Georgia;
Number of loan agreements with one or more types of assistance: 21;
Principal forgiveness: [Empty];
Negative interest rate loans: [Check];
Extended loan terms: [Empty].
State: Idaho;
Number of loan agreements with one or more types of assistance: 0;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Indiana;
Number of loan agreements with one or more types of assistance: 10;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Kentucky;
Number of loan agreements with one or more types of assistance: 0;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Maryland;
Number of loan agreements with one or more types of assistance: 2;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Maine;
Number of loan agreements with one or more types of assistance: 17;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Michigan;
Number of loan agreements with one or more types of assistance: 3;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Minnesota;
Number of loan agreements with one or more types of assistance: 5;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Empty].
State: Montana;
Number of loan agreements with one or more types of assistance: 2;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Nebraska;
Number of loan agreements with one or more types of assistance: 17;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: New Hampshire;
Number of loan agreements with one or more types of assistance: 0;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Empty].
State: New Mexico;
Number of loan agreements with one or more types of assistance: 0;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Nevada;
Number of loan agreements with one or more types of assistance: 0;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: New York;
Number of loan agreements with one or more types of assistance: 8;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Oregon;
Number of loan agreements with one or more types of assistance: 9;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Pennsylvania;
Number of loan agreements with one or more types of assistance: 9;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: South Carolina;
Number of loan agreements with one or more types of assistance: 1;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: South Dakota;
Number of loan agreements with one or more types of assistance: 4;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Tennessee;
Number of loan agreements with one or more types of assistance: 0;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Texas;
Number of loan agreements with one or more types of assistance: 6;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Utah;
Number of loan agreements with one or more types of assistance: 4;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Empty].
State: Virginia;
Number of loan agreements with one or more types of assistance: 19;
Principal forgiveness: [Check];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: Vermont;
Number of loan agreements with one or more types of assistance: 16;
Principal forgiveness: [Empty];
Negative interest rate loans: [Check];
Extended loan terms: [Check].
State: Washington;
Number of loan agreements with one or more types of assistance: 4;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
State: West Virginia;
Number of loan agreements with one or more types of assistance: 8;
Principal forgiveness: [Empty];
Negative interest rate loans: [Empty];
Extended loan terms: [Check].
Total:
Number of loan agreements with one or more types of assistance: 289;
Principal forgiveness: 19;
Negative interest rate loans: 3;
Extended loan terms: 26.
Note: As indicated in the table, six states (Idaho, Kentucky, New
Hampshire, New Mexico, Nevada, and Tennessee) had not provided
assistance as of December 31, 2000. These states had no loan agreements
that included assistance to disadvantaged communities. In addition, of
the four states that offer both principal forgiveness and extended loan
terms, Arizona, Delaware, and Michigan had offered only extended loan
terms, while California had used only principal forgiveness.
Source: GAO‘s survey of 50 state drinking water programs.
[End of table]
Some states limit the amount of loan subsidies they provide to
disadvantaged communities. For example, 11 states have established caps
on the amounts of their loan subsidies, such as $500,000 per project or
50 percent of the project costs. Another eight states offer principal
forgiveness only in cases when extending the loan term to 30 years does
not make the cost of a project affordable to the community. For
example, any water system in California that qualifies for assistance
as a disadvantaged community automatically receives a loan at 0 percent
interest and with a term extended to 30 years. If, under those
conditions, the system‘s rates still exceed 1.5 percent of the
community‘s median household income, then the state will offer
principal forgiveness”but only if the system is publicly owned. Two of
the three states that offer negative interest rate loans reduce the
interest rates on individual project loans incrementally until a
community‘s water rates reach some type of affordability threshold. For
example, the Vermont DWSRF program reduces the interest rate on a
project loan by one-tenth of 1 percent until a community‘s water rates
reach an affordable level (as defined by the state), but the interest
rate may not fall below negative 3 percent.
In addition to loan subsidies and extended loan terms, many states
offer disadvantaged communities special interest rates that are less
than the interest rates available to other DWSRF applicants.[Footnote
17] According to our survey results, 20 states offer specially reduced
interest rates as low as 0 percent to disadvantaged communities. In
addition, four states that currently do not have disadvantaged
community programs offer specially reduced interest rates to
communities with ’higher needs.“
Under the 1996 amendments to the Safe Drinking Water Act, the Congress
authorized states to use an amount equal to up to 30 percent of their
DWSRF capitalization grants to provide additional subsidies to
communities that qualify as ’disadvantaged.“ To get a rough estimate of
the magnitude of states‘ use of loan subsidies, we compared the
capitalization grants received by the states as of December 31, 2000,
and the amount of loan subsidies the states had provided within the
same time period. We found that of the 14 states that had provided loan
subsidies,[Footnote 18] only Maine came close to reaching the 30
percent cap. Table 2 shows the amount of each state‘s loan subsidies as
a percentage of its capitalization grants through December 31, 2000.
Table 2: Percentage of DWSRF Capitalization Grants Used for Subsidies
to Disadvantaged Communities, by State, through December 31, 2000:
State: Maine
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 23;
Total DWSRF capitalization grants to states: $27,238,300;
Amount of DWSRF subsidies to disadvantaged communities: $6,339,289.
State: Virginia
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 19;
Total DWSRF capitalization grants to states: $73,037,100;
Amount of DWSRF subsidies to disadvantaged communities: $14,127,005.
State: Alaska
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 16;
Total DWSRF capitalization grants to states: $49,381,100;
Amount of DWSRF subsidies to disadvantaged communities: $7,821,000.
State: Florida
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 15;
Total DWSRF capitalization grants to states: $109,896,800;
Amount of DWSRF subsidies to disadvantaged communities: $16,483,691.
State: Georgia
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 13;
Total DWSRF capitalization grants to states: $57,015,200;
Amount of DWSRF subsidies to disadvantaged communities: $7,544,010.
State: Vermont
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 11;
Total DWSRF capitalization grants to states: $34,900,900;
Amount of DWSRF subsidies to disadvantaged communities: $3,921,000.
State: Nebraska
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 9;
Total DWSRF capitalization grants to states: $27,409,100;
Amount of DWSRF subsidies to disadvantaged communities: $2,567,414.
State: New York
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 5;
Total DWSRF capitalization grants to states: $200,542,70;
Amount of DWSRF subsidies to disadvantaged communities: $9,752,935.
State: Utah
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 4;
Total DWSRF capitalization grants to states: $34,900,900;
Amount of DWSRF subsidies to disadvantaged communities: $1,315,000.
State: Texas
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 3;
Total DWSRF capitalization grants to states: $239,616,900;
Amount of DWSRF subsidies to disadvantaged communities: $7,280,235.
State: Minnesota
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 3;
Total DWSRF capitalization grants to states: $79,283,000;
Amount of DWSRF subsidies to disadvantaged communities: $2,195,983.
State: California
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 2;
Total DWSRF capitalization grants to states: $317,600,600;
Amount of DWSRF subsidies to disadvantaged communities: $6,729,021.
State: Oregon
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 0.48;
Total DWSRF capitalization grants to states: $52,075,600;
Amount of DWSRF subsidies to disadvantaged communities: $250,000.
State: Maryland
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants: 0.46;
Total DWSRF capitalization grants to states: $37,888,610;
Amount of DWSRF subsidies to disadvantaged communities: $175,000.
Total:
Total DWSRF capitalization grants to states: $1,340,786,810;
Amount of DWSRF subsidies to disadvantaged communities: $86,501,583.
Source: GAO‘s analysis of EPA data and GAO‘s survey of 50 state
drinking water programs.
[End of table]
State Criteria for Disadvantaged Community Assistance Vary:
Under the DWSRF program, states have the flexibility to develop their
own criteria to define a disadvantaged community. States with
disadvantaged community programs typically use some measure of
household water rates relative to the community‘s median household
income to qualify a community as ’disadvantaged.“ This approach allows
the state to assess the impact of capital project debt on the
community‘s water rates and measure the project‘s affordability. Of the
31 states with a disadvantaged community program, 27 have adopted
criteria that consider local water rates, often in conjunction with a
community‘s median household income. For example, seven states have
determined that a community qualifies as ’disadvantaged“ if its water
rates are at least 1 percent of its median household income.[Footnote
19] Another 11 states have established thresholds for local water rates
ranging from 1.25 to 2 percent of median household income. The
remaining nine states use different thresholds depending on the
community‘s median household income or a formula that considers other
factors.
Twenty-one states use median household income as a criterion in
determining whether communities qualify as disadvantaged.[Footnote 20]
Of these 21 states,
* 14 required a community‘s median household income to be at or below
the median income for the state to be considered disadvantaged and 4
other states compare local household income with the median income for
the county;
* 9 offered assistance to disadvantaged communities only if the local
median household income is no higher than 80 percent of the state or
county median. In seven states, a community is eligible for assistance
if the local median income is equal to”or, in one case, 90 percent
of”the median household income for the state;
* In Michigan and Nebraska, a community can qualify for assistance with
a median household income as high as 120 percent of the state‘s median
income, provided that the system is publicly owned and its water rates
exceed the state‘s affordability threshold; and;
* 19 considered both median household income and water rates in their
definition of disadvantaged communities.
In addition to the financial criteria, some states have other
qualifications that a community must meet before becoming designated as
disadvantaged. For example, in 11 states only publicly owned water
systems are eligible for loan subsidies; privately owned water systems,
such as mobile home parks, are not eligible for such assistance. Four
states indicated that a community‘s drinking water must pose a
significant public health risk to the residents for the community to be
eligible for special assistance. In two states, a water system must
serve a small community to qualify as a disadvantaged community.
[Footnote 21]
In the course of our review, we noted that while many states offer a
wide variety of DWSRF disadvantaged community programs, only a handful
of states have made an attempt to estimate the universe of water
systems that met state-defined criteria for disadvantaged communities.
Using the data provided in EPA‘s national sample of small water
systems, we attempted to estimate the number of systems that might
qualify for disadvantaged assistance. (See appendix I for details.)
Several Factors Influence States‘ Decisions to Adopt Disadvantaged
Community Programs:
As part of our questionnaire, we asked the states to report reasons why
they had chosen not to adopt a DWSRF program for disadvantaged
communities. Of the 19 states without disadvantaged community
programs, we found that:
* 16 states cited concerns about maintaining the corpus of the fund or
the long-term viability of the fund as a major (12) or moderate (4)
reason for not establishing a disadvantaged community program;
* 14 states cited the fact that their DWSRF program already offers
loans at below-market interest rates as a major (9) or moderate (5)
reason for not offering additional assistance to disadvantaged
communities; and;
* 12 states cited the availability of other federal or state programs
to address the needs of disadvantaged communities as a major (5) or
moderate (9) reason for not providing assistance through the DWSRF.
[Footnote 22]
Non-DWSRF financing from other federal and state sources is available
to help disadvantaged communities, and many states coordinate with
these sources to help disadvantaged communities secure the funding they
need. According to the state drinking water officials we interviewed,
disadvantaged communities often receive a combination of DWSRF and non-
DWSRF funding to finance their drinking water projects. For example,
the Department of Agriculture‘s Rural Utilities Service and the
Department of Housing and Urban Development‘s Community Development
Block Grant program provide grants and loans for activities such as
drinking water and wastewater projects, planning, and technical
assistance. These programs target rural and/or low-to-moderate income
communities.
In addition to federal programs, many states sponsor their own grant or
loan programs. In our survey, more than half the states indicated that
they provided some type of financial assistance for drinking water
projects. Six of the 19 states without disadvantaged community programs
had state grant or loan programs intended specifically to help
economically distressed communities finance drinking water improvement
projects. We recently reported that states sponsored over $9 billion in
grants and loans for drinking water and/or wastewater infrastructure
improvements from fiscal year 1991 through fiscal year 2000.[Footnote
23] Most of the assistance was generally available, but some assistance
was specifically targeted at economically distressed communities.
EPA Is Not Taking Full Advantage of Its Oversight Tools to Monitor the
States‘ Implementation of the DWSRF Program:
As part of its ongoing effort to monitor states‘ implementation of the
DWSRF program, EPA has developed a national information management
system to track states‘ use of DWSRF funds. While EPA is using the
system to develop financial management and other measures, until these
measures are consistently applied during performance reviews of state
DWSRF programs, their utility as an oversight tool is limited.
Furthermore, problems with the timely and consistent preparation of PER
reports”one of EPA‘s principal oversight tools”hamper its ability to
use the reports to identify common or recurring problems among the
states. Finally, gaps in the financial audit coverage, and a limited
review of audits that are performed, affect EPA‘s ability to fully
assess the financial condition of the states‘ DWSRF programs.
EPA Could Make Better Use of Its Information System to Monitor State
Performance and Provide Information on Overall Program Effectiveness:
EPA designed its drinking water national information management system
(NIMS) to better assess the DWSRF program, monitor state progress, and
provide assistance in the agency‘s annual reviews of state programs.
The NIMS database contains a variety of information on the amount and
status of DWSRF moneys, the states‘ progress in getting funds to local
communities, the types of assistance being provided, and other
information. Currently, EPA‘s information system can produce 83
standard reports on various aspects of the DWSRF program. For example,
NIMS can report the amount of assistance by system size and type of
project, such as the construction of treatment or storage facilities,
construction of distribution systems, or land acquisition, as well as
the amount of assistance provided to small water systems. EPA requires
states to submit information annually on their use of DWSRF funds, and
updates NIMS accordingly.[Footnote 24] NIMS can produce reports showing
information on an annual or cumulative basis, aggregate information on
a state-by-state basis or by EPA region, and provide customized
reports.
EPA‘s NIMS database and the reports that it can generate provide a
useful national perspective on the DWSRF program in terms of the amount
and type of assistance that states provide to local communities. For
example, EPA can use NIMS data to determine the cumulative amount of
DWSRF assistance as a percentage of the funds available since the
program‘s inception. EPA can also provide cumulative reports on the
pace of the DWSRF program in getting assistance out to local
communities, including such information as project starts, project
disbursements, projects completed, and loan principal repayments.
While useful in many ways, NIMS has some limitations in monitoring
state progress. In particular, the system was not designed to monitor
the extent that states comply with statutory spending restrictions.
According to EPA officials, NIMS was designed to track the states‘
overall program activity using funds from multiple sources, including
capitalization grants, state matching funds, and other sources, such as
loan repayments. They also noted that designing a system capable of
tracking compliance with the spending restrictions would be difficult
and unworkable because of the timing of the movement of funds in the
program. For example, states can receive annual grants over a 2-year
period and may obligate funds from one grant to projects over a period
of several years.
In addition to tracking some elements of state progress, NIMS provides
useful information that EPA regional officials can use when conducting
their annual performance evaluations of state DWSRF programs. However,
officials in 7 of the 10 regions said that they used the system either
on a very limited basis or never used it at all, primarily because more
timely information was readily available from other sources. EPA
headquarters officials pointed out that NIMS is relatively new; the
initial data collection took place during the late summer of 2000 and
the final data were not available for oversight purposes until November
2000. The officials said that they would now start working with
regional officials to make greater use of the information system in
their annual state performance evaluations.
In April 2001, DWSRF program managers at EPA headquarters drafted
financial management and other measures that rely on NIMS data to track
the progress of the program. The financial management measures address
the following aspects of state DWSRF programs:
* progress in committing funds to projects (such as loan assistance as
a percentage of funds available);
* pace of construction (such as disbursements as a percentage of
assistance provided); and;
* the extent that DWSRF moneys are being recycled (such as principal
repayments as a percentage of assistance provided).
The success of this effort, however, hinges on the regional offices
making greater use of NIMS. In addition, the agency is currently using
the draft measures for internal management purposes only. However,
until these measures are consistently applied during performance
reviews of state DWSRF programs, their utility as an oversight tool
cannot be assessed. Furthermore, by limiting these measures to internal
use, they cannot be used by others outside EPA to assess the program‘s
overall effectiveness.
EPA‘s Annual Evaluations of State DWSRF Programs Are Not Timely or
Consistent:
According to EPA officials, in addition to the regular day-to-day
contacts with state DWSRF staff, the annual program evaluation reviews
of state DWSRF programs serve as one of the agency‘s principal
oversight tools. Among other things, the objectives of the annual
review are to evaluate (1) a state‘s success in achieving the goals and
objectives outlined in its intended use plan and other reports
submitted to EPA; (2) how well a state‘s DWSRF program is achieving the
intent of applicable statutory provisions, such as funding projects in
accordance with identified priorities;[Footnote 25] (3) a state‘s
compliance with the conditions of its capitalization grant agreements;
and (4) the financial status of a state‘s DWSRF. However, we found that
many reviews were not timely or consistent in terms of their scope or
documentation.
EPA‘s regional offices are responsible for conducting annual reviews of
state DWSRF programs. According to EPA‘s guidance, such reviews should
(1) include an on-site visit to meet with state program managers and
review pertinent records and a written report to document the results
of the review and (2) culminate in a written report. The guidance also
states that the reviews should take place within ’a reasonable time
period“ following receipt of a state‘s biennial report.[Footnote 26]
While there is no definitive requirement for the timing of the annual
reviews, EPA program managers said that the regional offices are
expected to prepare a report documenting the results of the review
within 90 days of the site visit to a state.
To evaluate the timeliness of EPA‘s state performance evaluations, we
focused on two key elements: (1) the preparation of final reports
within 90 days of the site visits and (2) the requirement that reviews
be conducted annually. We found the following:
* Of the 47 states for which the EPA regional offices had prepared
reports on their annual reviews, 60 percent of the reports were issued
late, and EPA‘s regional offices exceeded the 90-day time limit by
about 4 months, on average. In six states, the reports were over 9
months late. Limited staffing is one of the major reasons that the
reports are not completed on time, according to regional officials. In
addition, officials from three EPA regions told us that the reports
were delayed to allow time for concerns discovered during on-site
reviews to be resolved with the states.
* As of October 2001, EPA officials have not prepared evaluation
reports for New Jersey, Utah, or Wyoming. In New Jersey, EPA officials
said that regional officials visited the state every 6 months and
covered many of the elements that would otherwise be addressed in a
formal review. In Utah and Wyoming, regional officials made site visits
to conduct the annual reviews during July and December 1999,
respectively, but never issued reports. EPA headquarters officials told
us that regional officials did not issue a report for Utah‘s program
and instead issued a Notice of Noncompliance, which covered the
deficiencies identified during the review.[Footnote 27] In the case of
Wyoming, regional officials said that they wanted to conduct a second,
follow-up review before issuing a final report, but had encountered
scheduling difficulties over the past 22 months.
* In 10 states, EPA regional officials did not issue PER reports during
calendar year 2000, although reporting was resumed the following year.
In 11 more states, the most recent performance evaluation reports were
issued more than a year ago and, as of October 1, 2001, they were late
by about 9 months, on average. According to several EPA regional
officials, they did not prepare evaluation reports on an annual basis
because of staffing constraints.
* Although the reporting has not been timely, EPA has conducted annual,
on-site reviews in most states. We found four states”Alaska, Michigan,
Oregon, and Wyoming”that have not received an on-site performance
evaluation within a year of the previous one. As of October 1, 2001,
the time elapsed since the last review in these states ranged from 15
to 30 months.
In conducting a content analysis of the 47 available PER reports, we
found inconsistencies in their scope and documentation. According to
EPA-issued guidance to assist its regional offices,[Footnote 28] an
annual review should consider the legal, managerial, technical,
financial, and operational capabilities of the applicable state agency
to effectively administer the DWSRF. The guidance states that the
regional offices should evaluate state adherence to 17 certifications
and assurances that are required of a state to receive a capitalization
grant. For example, regional officials are expected to check that the
state has provided adequate personnel and other resources to
effectively operate and manage the program, met matching requirements,
and complied with applicable laws and regulations. In addition to these
federal program assurances, the guidance calls for an evaluation of
other aspects of a state‘s DWSRF program during an annual review. For
example, in terms of general program management, regional officials
should assess the eligibility of the DWSRF assistance as it pertains to
the recipients, types of projects, and types of financial assistance
provided. Similarly, within the general category of financial
management, regional officials are expected to check on the adequacy of
the financial statements and internal controls, the timeliness of
deposits into appropriate fund accounts, the use of funds for set-aside
purposes, and other items.
In total, the guidance identifies about 50 specific elements that
should be covered in an annual review. EPA recognizes that every
element does not require an in-depth review each year and gives its
regional offices the flexibility to tailor their reviews as
appropriate. Specifically, the guidance states: ’Each year the review
may be targeted toward specific program aspects that have not
previously or recently been reviewed in-depth or have proven to be
problematic in the past. This will allow the region to concentrate its
efforts on program aspects that require attention.“[Footnote 29] In
terms of documenting the annual reviews, EPA‘s guidance states that, at
a minimum, the reports should include sections on purpose, background,
scope, observations, and recommendations.
One of the major problems we identified in reviewing EPA‘s performance
evaluation reports was that they often had no clear or specific
description of what was and was not covered in the annual review. For
example, in 15 reports, the scope of the review was reported only in
terms of a state fiscal year and a list of the project files reviewed.
Another 15 reports described the scope in very general terms and noted
only the broadest categories of review, such as ’financial management.“
[Footnote 30] As a result of the inadequate scope descriptions and wide
variation in the level of detail with which regional officials
summarized their observations, we often could not determine what was
covered in the review or what regional officials concluded about each
aspect. More specifically, when the reports were silent regarding
certain program elements, we could not determine whether the reason was
that the elements were reviewed and found to be satisfactory or not
reviewed at all.
EPA officials from headquarters and regional offices offered a variety
of explanations for the inconsistencies in the documentation of the
state performance evaluations. For example, some officials viewed the
program evaluation reports principally as a tool to assist the states,
rather than as a means of helping EPA to evaluate overall program
effectiveness. These officials told us that it is unnecessary for the
written reports to contain detailed information because the findings
are conveyed to the states orally. Officials from some regional offices
indicated their reluctance to include concerns in a written report if
the concerns had already been brought to the attention of the state and
resolved. We also heard that staffing and time constraints hampered the
ability of regional staff to document their reviews more thoroughly
and, in some instances, this meant reporting findings on an exception
basis. However, using the latter approach when the scope of the review
is unclear makes it impossible to determine whether some program
elements were reviewed and found to be satisfactory or simply not
reviewed.
A key DWSRF program manager at EPA headquarters generally concurred
with our observations, noting that one of the agency‘s areas of concern
has been the timeliness and quality of the regions‘ annual reviews and
the resultant performance evaluation reports. In May 2001, the managers
developed a regional review strategy for annually reviewing the
regional offices‘ performance in implementing their oversight
responsibilities.[Footnote 31] Among other things, these reviews would
cover the (1) documentation of regional observations, findings, and
general oversight activities; (2) adequacy of staffing and resource
allocations for regional oversight; and (3) adequacy of annual reviews
of state DWSRF programs, including an assessment of the timeliness and
completeness of the region‘s performance evaluation reports. While
initiating the regional reviews is a positive step, other actions may
be warranted to improve the usefulness of the annual state reviews both
in assisting the states and as a tool for evaluating overall program
effectiveness. At this time, EPA has no centralized system for tracking
the timeliness of the annual reviews or performance evaluation reports
by its regional offices, identifying common or recurring problems among
the states, or monitoring the status of their corrective actions.
Gaps in Audit Coverage Limit EPA‘s Ability to Assess State Programs‘
Financial Condition:
In accordance with the 1996 amendments to the Safe Drinking Water Act,
EPA‘s implementing regulations contain provisions directed to ’ensure
the financial integrity of the DWSRF program.“ Under the amendments,
for example, EPA was required to periodically audit the states‘ DWSRF
funds. In addition, EPA was required to publish guidance and
regulations to ensure, among other things, that the states (1) commit
and expend funds as efficiently as possible and (2) use accounting,
audit, and fiscal procedures that conform to generally accepted
accounting principles. EPA‘s regulations further provide that states
may voluntarily agree to conduct annual independent audits that cover
financial statements, internal controls, and compliance with applicable
requirements. States that do not conduct their own audits are subject
to periodic audits by OIG. EPA‘s regulations also specify that states
provide detailed financial statements presenting the financial status
of the DWSRF in their biennial reports to EPA.
EPA relies primarily on its OIG to assess the adequacy of the DWSRF
program‘s financial controls. To facilitate the process, officials from
EPA‘s program offices and OIG developed an audit strategy for the DWSRF
program.[Footnote 32] According to our discussions with these
officials, the key elements of the DWSRF audit strategy are:
* conducting audits in states that did not perform their own;
* reviewing the quality of the independent audits done by the states;
and;
* developing OIG guidance for the conduct of DWSRF audits.
As of September 2001, EPA has yet to fully implement its audit
strategy. First, the Inspector General did not audit the eight states
that (1) had not voluntarily agreed to conduct an independent audit or
(2) did not have a Single Audit that was considered the equivalent of
an independent audit.[Footnote 33] Second, the Inspector General
reviewed the audit quality of only 7 of the 24 audits submitted by
states for fiscal year 2000. Finally, the Inspector General has not
issued guidance on conducting DWSRF audits; officials from EPA‘s
regional offices believe such guidance would benefit them as well as
the states.
The Inspector General is now in the process of scheduling audits in
states where no audit has been conducted; the first is underway in the
state of Washington, and EPA plans to issue its final report on that
state in February 2002. Inspector General officials told us that they
prioritize the states to be audited according to the resources
available to conduct the audits and the Inspector General‘s experience
with the states in question. They also consider other criteria,
including the amount of time that has elapsed since the state‘s Clean
Water State Revolving Fund was audited and whether the Clean Water and
Drinking Water funds are managed by the same state agency.
Both EPA and OIG officials told us that auditing states where DWSRF
programs had never been audited any sooner would not have been cost-
effective because of the relatively low level of the loan activity in
the states‘ DWSRF programs during its early years. In addition, the
Inspector General‘s Western Audit Division, which is responsible for
conducting and reviewing audits in both the Clean Water State Revolving
Fund and DWSRF programs, has only four staff to devote to this effort.
OIG officials told us that because the Clean Water funds have been in
existence much longer, and are much larger, than their DWSRF
counterparts, they take priority as a result.
In an effort to track the status of independent audits of states‘ DWSRF
programs, an OIG official recently developed a spreadsheet to collect
information on (1) when the audit reports were submitted and (2) the
scope of the audit reports. Specifically, the spreadsheet was designed
to track whether the audits covered the elements that, according to
EPA‘s regulations, should be included:
* an auditor‘s opinion on the DWSRF program financial statements;
* reports on internal controls; and;
* reports on compliance with applicable statutory, regulatory, and
general grant requirements.
The spreadsheet lists audit reports for 32 states, of which 24 covered
fiscal year 2000, 7 covered fiscal year 1999, and 1 covered fiscal year
1998. Table 3 provides a summary of the spreadsheet data.
Table 3: Scope of Independent Audit Reports Submitted to Inspector
General:
Key elements of independent audit: Financial statements;
Status as determined by Inspector General: OK: 31;
Status as determined by Inspector General: No or none: 0;
Status as determined by Inspector General: Disclaimer: 0;
Status as determined by Inspector General: Marginal: 1;
Total: 32.
Key elements of independent audit: Internal controls;
Status as determined by Inspector General: OK: 28;
Status as determined by Inspector General: No or none: 3;
Status as determined by Inspector General: Disclaimer: 0;
Status as determined by Inspector General: Marginal: 1;
Total: 32.
Key elements of independent audit: Compliance;
Status as determined by Inspector General: OK: 20;
Status as determined by Inspector General: No or none: 3;
Status as determined by Inspector General: Disclaimer: 9;
Status as determined by Inspector General: Marginal: 0;
Total: 32.
Legend:
’OK“ means that the auditor‘s opinion on the financial statements or
the auditor‘s report on internal controls was adequate or that the
auditor‘s report contained an opinion on compliance.
’No or none“ means that the auditor did not provide an opinion on
internal controls or compliance.
’Disclaimer“ means that the auditor‘s report contained a disclaimer
stating that compliance was not an objective of the audit.
’Marginal“ means that auditor‘s opinion or report did not contain
enough information and was, therefore, marginally acceptable.
Source: EPA‘s Office of Inspector General.
[End of table]
Based on data contained in the OIG spreadsheet, some of the independent
audits were limited in scope or less than adequate in reporting on some
of the elements. For example, three states did not provide a report on
internal controls or compliance.
In addition to checking the extent that the 32 state audit reports
covered the three elements described in EPA‘s regulations, OIG
officials conducted a more detailed review for 10 of these reports for
audit quality.[Footnote 34] OIG officials told us that although it
would be desirable to check more reports for audit quality, checking
audit quality was a lesser priority than getting states to voluntarily
conduct independent audits and making sure that these audits covered
the elements.
DWSRF program and OIG officials acknowledge that EPA does not have a
process for ensuring that (1) the state and the cognizant regional
officials are informed of any concerns about audit coverage or quality
or (2) corrective action is taken. Such coordination between program
and OIG officials is necessary because, according to program officials,
they do not systematically monitor the status of the states‘
independent audits. DWSRF program officials noted that resource
constraints limit their ability to review the audits themselves, and as
a result, they increasingly rely on the OIG to review audits and assess
their quality. For example, one regional official we interviewed
reported having no available financial staff to review state DWSRF
programs, and an official from another region stated that budgetary
constraints limited the amount of time he could spend reviewing DWSRF
financial documents.
The Inspector General has not developed guidance for the conduct of
DWSRF audits. Officials from several of the regional offices we
contacted told us that such guidance would be beneficial to DWSRF
program auditors. However, according to one OIG official, the
development of such guidance has been delayed until the office can
incorporate any insights it gains from conducting its own audits at the
states”audits which are now just in the planning stages. Although the
OIG originally scheduled the DWSRF audit guidance to be completed in
fiscal year 2001, it now expects to have the guidance available for the
states and other interested parties during fiscal year 2002. In the
meantime, OIG officials noted that other guidance is available, such as
the Inspector General‘s Comprehensive Audit Guide for the Clean Water
State Revolving Fund, the OMB Circular A-133 compliance supplement,
[Footnote 35] and model DWSRF financial audit statements.
In addition to guidance, better coordination and information sharing
are needed between the DWSRF program office and OIG staff. Officials
from four regional offices told us that they were unaware of the
Inspector General‘s planned audit schedule and, in one instance,
expressed concern that they had not been consulted about which states
should receive priority. In addition, although we found some
indications that either headquarters or regional officials had
requested assistance from the Inspector General as a result of problems
or concerns identified during annual reviews, OIG officials did not
receive copies of the regional performance evaluation reports on a
regular basis. These reports sometimes contain indications of problem
areas, such as poor cash management or inadequate staffing levels,
which could be useful in helping the Inspector General to identify and
prioritize candidates for closer scrutiny, such as checking the quality
of states‘ independent audits. Similarly, although the OIG spreadsheet
on the status of state audits was intended only for internal use,
regional officials might have benefited from knowing about gaps in
audit coverage or other limitations when they prioritized, and
determined the scope of, state performance evaluations.
Conclusions:
EPA has laid the groundwork for its DWSRF program. It must now
safeguard program funds through prudent oversight and good management
to ensure the long-term viability of the DWSRF program and the
availability of this major source of infrastructure financing for
generations to come.
EPA‘s estimate of the nation‘s drinking water infrastructure needs has
far-reaching implications. First, it influences the level of
congressional appropriations for the DWSRF program. Second and more
importantly, EPA uses this estimate to guide the agency‘s annual
allocation of DWSRF funds to the states. Although EPA has taken steps
to validate the data to instill confidence in the estimate and its
subsequent allotments to the states, the precision of the estimate is
unknown. Until EPA calculates and reports the level of precision in its
needs assessment survey it does not know how close the estimate comes
to reflecting the nation‘s true needs.
Measuring the overall effectiveness of a program as complex as the
DWSRF is not an enviable task. EPA has an opportunity while the program
is maturing to use the oversight tools at its disposal to diagnose the
program‘s overall health and prescribe remedies as needed. However, EPA
is not making the most out of these tools. Without finalizing and
applying its financial management measures, bringing greater
consistency to its annual review process, and monitoring audit coverage
and quality, EPA does not have all the information it needs to monitor
the states‘ implementation of the program or assess the program‘s
overall effectiveness.
Recommendations for Executive Action:
To get a better sense of the accuracy of EPA‘s estimate, we are
recommending that EPA calculate and report the level of precision
actually achieved in its recent needs assessment, and determine what
implications, if any, its findings have on the way future needs
assessment surveys are conducted.
To improve EPA‘s oversight of the DWSRF program and its ability to
assess overall program effectiveness, we recommend that the EPA
Administrator take the following steps:
* finalize and consistently apply financial management and other
program measures to assist in the annual review of state performance
and make them available outside EPA, so that others can assess the
overall effectiveness of the program;
* improve the timeliness of and require greater consistency in the
scope and documentation of the annual program evaluations, so that the
results of the evaluations can be systematically reviewed to identify
broad-based problems that may require national solutions;
* conduct independent audits in the states where no audits have been
done, track and evaluate the quality of audits performed by others, and
complete financial audit guidelines for the DWSRF program; and;
* facilitate the exchange of audit findings and program evaluation
results between DWSRF program and OIG officials.
Agency Comments:
We provided a draft of this report to EPA for its review and comment.
EPA‘s Office of Water and Office of Inspector General provided
comments, which we have included in appendixes III and IV of this
report, respectively. Overall, EPA agreed with our findings and
recommendations. Although EPA indicated that it would revisit the issue
of calculating actual precision levels in the design of its 2003
survey, our recommendation called for more specific action. Namely, we
recommended that EPA calculate and report the level of precision for
its 1999 needs assessment and determine the implications, if any, it
has on how the 2003 survey is conducted. Knowing the level of precision
actually achieved will help EPA and other users of the needs assessment
get a sense of how closely the estimate reflects actual needs. EPA also
provided technical clarifications, which we incorporated, as
appropriate.
Scope and Methodology:
To conduct our work, we interviewed officials in EPA‘s Office of Ground
Water and Drinking Water and Office of Wastewater Management where we
obtained and reviewed relevant legislation, regulations, guidance,
reports, and other documents. We also interviewed DWSRF officials in
each of EPA‘s 10 regional offices and officials from the Office of the
Inspector General at EPA headquarters and offices in Sacramento and San
Francisco, California, and in Denver, Colorado. Finally, we conducted a
nationwide survey of key drinking water officials in the 50 states.
To address the first objective, we conducted interviews with officials
in EPA‘s Office of Ground Water and Drinking Water and their technical
advisers about EPA‘s needs assessment survey, the particular
methodologies used to estimate the cost of needed drinking water
facility improvements over the next 20 years, and how those estimates
were used to allot moneys to the states. We reviewed available
documentation on the statistical sampling and estimation methods used
in the EPA survey as well as the documentation describing EPA‘s data
collection and quality control procedures. We also developed and
conducted a survey of all 50 states‘ drinking water officials to
ascertain the magnitude of the disadvantaged community need and the
extent to which states were using the DWSRF program to address that
need. We obtained responses from all 50 states. As part of our survey
of state officials, we asked officials to indicate whether each of the
small systems in EPA‘s needs assessment sample qualified as a
disadvantaged system. We used this information to estimate the number
of disadvantaged small systems in the 50 states. (See appendix I.)
[Footnote 36]
To examine EPA‘s efforts to evaluate program effectiveness, we obtained
information on the data elements and standard reports within EPA‘s
national information management system for the DWSRF program and
interviewed headquarters and regional officials regarding their use of
the system and its limitations. To assess the timeliness of the annual
review process, we obtained information on the submission dates for the
states‘ biennial reports, the dates that regional offices conducted
annual reviews of state DWSRF performance, and the dates that the
evaluation reports were issued. We reviewed EPA‘s guidance on the
annual review process, along with the most recently completed
performance evaluation report for each state, and evaluated the scope
and content of the reports relative to EPA‘s guidance. We obtained the
views of headquarters and regional DWSRF officials on the purpose of
the annual review process and the evaluation reports and the reasons
for differences in the timing, scope, and documentation of the reviews.
To examine EPA‘s strategy for ensuring the financial integrity of the
DWSRF program, we interviewed EPA program and Inspector General
officials about their roles and responsibilities. We also obtained
information on the Inspector General‘s efforts to monitor the quality
of the states‘ independent audits and to conduct audits in the states
that lacked audits of their own. Finally, we reviewed excerpts from
EPA‘s Strategic Plan as well as annual performance measures developed
for the DWSRF program to assess the agency‘s use of results-oriented
performance measures.
We conducted this review from October 2000 through November 2001 in
accordance with generally accepted government auditing standards.
As we agreed with your office, unless you announce its contents
earlier, we plan no further distribution of the report until 30 days
from the date of this letter. We will then send copies to the EPA
Administrator and make copies available to others who request them.
If you, or your staff, have questions about this report, please call me
on (202) 512-3841. Contributors to this report are listed in appendix
V.
Signed by:
John B. Stephenson:
Director, Natural Resources and Environment:
[End of section]
Appendix I: Efforts to Determine the Universe of Water Systems Eligible
for DWSRF Disadvantaged Assistance:
Because providing additional loan subsidies to disadvantaged
communities can affect the extent that states‘ revolving funds are
replenished, we were interested in finding out what proportion of the
nation‘s community water systems qualified as disadvantaged communities
and would thus be eligible to receive special assistance. EPA officials
told us that they had never tried to estimate the number of water
systems that qualified for such assistance. Furthermore, only 3 of the
50 states responding to our survey made attempts to develop such
estimates. As part of our review, we tried to use EPA‘s needs
assessment”and its statistical sample of small water systems in
particular”as a vehicle for estimating the number of systems that were
potentially eligible.
As part of a 50-state survey on DWSRF assistance for disadvantaged
communities,[Footnote 37] we asked the states with disadvantaged
community programs to report whether they had estimated the number of
water systems that would meet state-established criteria for a
disadvantaged community. According to our summary of their responses,
only 3 of the 31 states with programs made some attempt to develop such
estimates, while the remaining 28 had not. When asked why they had not
estimated the number of disadvantaged communities, 18 states reported
that they did not have the data needed to determine whether particular
systems meet the disadvantaged criteria until they actually applied for
DWSRF assistance. Under EPA regulations, states may provide assistance
to communities that meet the state‘s definition of ’disadvantaged“ or
which the state expects to qualify as disadvantaged as a result of the
project. Thus, while the number of systems that currently meet a
state‘s definition might be relatively easy to estimate, determining
the number of additional systems that would fall into the disadvantaged
category because of the high cost of a project, for example, would
require a case-by-case analysis. Other reasons that states gave for not
developing an estimate included insufficient resources (five states)
and the fact that getting such information was not a need or priority
for the state (five states).
Two of the three states that had estimated the number of their
disadvantaged systems generally did so by using a shortcut method
designed to project the magnitude of need. For example, Kentucky
reached its estimate that about 320 systems, or 43 percent of the
community water systems in the state, could be considered disadvantaged
by comparing water rates as a percentage of median household income.
However, according to state officials, the data on water rates were
about 5 years old. New Mexico came up with a rough estimate of
500”about 63 percent of the state‘s 795 community water systems”on the
basis of the percentage of disadvantaged systems that had already
applied for DWSRF assistance. Utah was the only state to develop an
estimate by applying its own criteria for disadvantaged communities.
[Footnote 38] The state determined that 112 communities, or about 25
percent of the state‘s 449 community water systems, would qualify for
the additional subsidies available to the disadvantaged.
In an effort to develop our own national estimate of the number of
disadvantaged communities, we started with same statistical sample of
small water systems that EPA had selected for its infrastructure needs
assessment because, according to EPA officials, the vast majority of
systems serving disadvantaged communities are likely to be small
systems.[Footnote 39] (Among other problems, small water systems often
lack the economies of scale that make infrastructure projects more
affordable at larger systems.) In addition, having the statistical
sample meant that we would be able to project the results to the
universe of small systems and obtain a national estimate.
As part of our 50-state questionnaire, we identified the specific
systems included in EPA‘s sample”from 5 to 34 systems in each state”and
asked the states to determine which ones they would consider to be
disadvantaged communities. When states were able to apply their own
criteria, we asked them to determine whether each system initially
qualified as disadvantaged or became disadvantaged as a result of the
additional costs needed to improve it. States without specific
criteria”or states with criteria that did not apply”were asked to use
GAO surrogate criteria.[Footnote 40]
In total, we obtained information on a portion of EPA‘s sample
representing 24,334 systems, or nearly 55 percent of the 44,373 small
community water systems in the United States. On the basis of EPA‘s
sample and the states‘ determinations, we estimated that 6,925 systems,
or about 28 percent of the 24,334 small systems reflected in the
results of our survey, qualified as ’disadvantaged.“[Footnote 41]
However, the high non-response rate associated with this analysis
precluded us from obtaining information on the systems representing the
remaining 45 percent of the universe. As a result, we could not
determine whether the actual percentage of systems that would qualify
as disadvantaged matched our findings. Specifically, we had no way of
determining whether the systems for which we had information were
systematically different from those systems for which we lacked
information in a way that would make the percentage of disadvantaged
communities higher or lower than what would be found in the universe as
a whole.
Our effort met with limited success for several reasons. The primary
reason was that some states did not have the information necessary to
readily make a determination about a system‘s disadvantaged status or
they lacked the time and resources to collect the information for us.
Also, as noted earlier, EPA did not determine the level of uncertainty,
or sampling error, in its needs estimate. Because of EPA‘s sampling
strategy, traditional methods for estimating sampling error cannot be
used, and developing an accurate measure of the precision of any
estimate for small systems would prove challenging at best. As a
result, we cannot draw any conclusions about the precision of our
estimate of water systems that qualify for assistance to disadvantaged
communities.[Footnote 42]
[End of section]
Appendix II: GAO‘s Survey of State Drinking Water Officials Regarding
Assistance to Disadvantaged Communities:
United States General Accounting Office:
Survey of State Drinking Water Officials Regarding Assistance to
Disadvantaged Communities:
Introduction:
The U.S. General Accounting Office has been asked by the Congress to
review the Drinking Water State Revolving Fund (DWSRF) program. As a
part of this review, we are conducting a survey of all 50 states to
collect information on the nature and extent of assistance provided to
disadvantaged communities.
The Congress is interested in using the information obtained through
this survey as it conducts oversight hearings on the effectiveness of
the DWSRF in addressing infrastructure needs at the nation's community
water systems.
Instructions:
Per our discussion with you, we are providing this list of questions.
In addition, we would like to discuss your responses with you over the
telephone in June. We will contact you for an appointment. Please fax
or mail your responses to the address provided below prior to our
discussion.
When answering these questions, please consult and coordinate with the
appropriate staff members in your state regarding the funding and
program operations of the DWSRF program.
The survey asks general questions regarding how your state assists
community water systems determined to be disadvantaged. In addition,
the survey includes some specific questions about the small community
water systems that EPA visited in your state when completing its 2000
Drinking Water Infrastructure Needs Survey. (We will supply the Public
Water System identification codes for these systems.) We plan to
conduct additional analysis with the data collected for these water
systems.
Because the majority of disadvantaged community water systems are
small, for the purposes of this survey, we have defined 'small' as
serving less than 3,300 persons.
Throughout the questionnaire, we will be using the term disadvantaged.
Under the DWSRF program, states have the option of using up to 30
percent of their federal capitalization grants to provide loan
subsidies, such as principal forgiveness or negative interest loans, to
communities that meet state-defined criteria for disadvantaged. In
addition, states may extend the repayment loan terms from 20 years to
up to 30 years, provided that the term of the loan does not exceed the
expected design life of the project.
Please mail or fax your completed responses to:
Teruni Rosengren:
U.S. General Accounting Office:
10 Causeway St. - Room 575:
Boston, MA 02222:
Fax # (617) 565-5909:
If you have any questions, please contact:
Teruni Rosengren:
(617) 565-7538:
Email: rosengrent@gao.gov:
Anna Kelley:
(617) 565-7499:
Email: kelleya@gao.gov:
Definition of Disadvantaged:
1. Does your state DWSRF have a program to assist disadvantaged
community water systems? (Check one) (N=50)
[31] Yes- Please send us a copy of your state's definition of
disadvantaged.
[19] No; (Go to Question 4).
2. Is your state's definition of disadvantaged the same as the
affordability criteria that your state uses to prioritize projects for
EPA Safe Drinking Water Act funding, or is it different? (Check one)
(N= 32)[Footnote 43]
[21][Footnote 44] Same as state's affordability criteria
[12] Different than state's affordability criteria
ID:
Type of Assistance Offered:
3. Currently, what type of DWSRF assistance does your state offer? For
each type of assistance your state offers, please indicate the extent
to which such assistance has actually been provided (e.g., the total
number of agreements that included this type of assistance made by your
state's DWSRF and the total amount of principal forgiven) from the
beginning of your state's DWSRF program through December 31 2000.
Type of Assistance Offered to Disadvantaged Communities: Principal
forgiveness;
Is assistance Offered (Check one for each type of assistance): Yes: 19;
No: 31;
Total Number of Agreements that Included this Type of Assistance
through December 31, 2000: 108.
Total amount of Principal Forgiven as of December 31, 2000:
$70,656,159.00.
Type of Assistance Offered to Disadvantaged Communities: Negative
interest rate loans;
Is assistance Offered (Check one for each type of assistance): Yes: 3;
No: 47;
Total Number of Agreements that Included this Type of Assistance
through December 31, 2000: 37.
Total amount of subsidy for negative interest rate loans, as of
December 31, 2000: $11,465,010.00.
Type of Assistance Offered to Disadvantaged Communities: Extended loan
terms of up to 30 years;
Is assistance Offered (Check one for each type of assistance): Yes: 25;
No: 25;
Total Number of Agreements that Included this Type of Assistance
through December 31, 2000: 129.
4. If your state does not currently offer any DWSRF assistance to
disadvantaged communities (e.g.. principal forgiveness, negative
interest rate loans, and/or extended loan terms up to 30 years), what
are the state's reasons? (Check one for each reason.)
Reason: Concerns about maintaining the corpus of the fund (or concerns
about the long term viability of fund);
Major Reason: 25;
Moderate Reason: 7;
Minor Reason: 3;
Not a Reason: 14;
Not applicable: 1.
Reason: Concerns about ability of disadvantaged communities to repay
loans;
Major Reason: 5;
Moderate Reason: 5;
Minor Reason: 8;
Not a Reason: 26;
Not applicable: 6.
Reason: Concerns that systems may lack the financial, managerial, and
technical capacity to maintain compliance;
Major Reason: 5;
Moderate Reason: 4;
Minor Reason: 14;
Not a Reason: 21;
Not applicable: 6.
Reason: State's DWSRF already offers low interest rate loans;
Major Reason: 16;
Moderate Reason: 10;
Minor Reason: 5;
Not a Reason: 14;
Not applicable: 5.
Reason: Availability of State programs or other state funding sources
to address the needs of disadvantaged communities:
Major Reason: 10;
Moderate Reason: 6;
Minor Reason: 6;
Not a Reason: 9;
Not applicable: 19.
Reason: Availability of other Federal programs or funding sources to
address the needs of disadvantaged communities;
Major Reason: 7;
Moderate Reason: 15;
Minor Reason: 8;
Not a Reason: 16;
Not applicable: 4.
Reason: Concerns about administrative burden with providing financial
assistance to disadvantaged communities;
Major Reason: 5;
Moderate Reason: 3;
Minor Reason: 4;
Not a Reason: 31;
Not applicable: 7;
Reason: Other 1 (Please specify);
Major Reason: 27;
Moderate Reason: 1.
Reason: Other 2 (Please specify);
Major Reason: 6.
5. If your state does not currently offer assistance to disadvantaged
communities, does it plan to do so in the next 3 years? (Check one)
[3]: Yes;
[16]: No.
6. Listed below are small community water systems that were visited in
EPA's Year 2000 Infrastructure Needs Survey. For each of these
communities, please indicate if each would have been considered a
disadvantaged community according to your state's DWSRF definition. If
your state does not have a definition or you cannot apply its
definition, please provide the system's average annual household water
user cost as a percentage of its median household income (MHI).
* If your state has a definition, please answer columns (B) and (C) for
each community water system.
* If your state does not have a definition or cannot apply its
definition, please provide the information requested in column (D) for
each community water system.
(A) Small community water system included in EPA's Drinking Water
Infrastructure. Needs sample by: PWS ID; Name.
[n=591 waster systems]; [N= 44,373 water systems]; all numbers in the
next columns are weighed numbers.
(B): Does the system currently qualify as a disadvantaged system
according to the state's definition (or the definition above) (Check
one for each community water system).
[4,872] Yes; [13,186] No; Go to column C.
(C): If the system does not currently qualify as a disadvantaged
system, would the additional costs needed to improve it, qualify the
system as disadvantaged? (Check one for each community water system).
[446] Yes; [7,833] No; [298] N/A-currently qualifies.
(D): If your state does not have a definition or you cannot apply its
definition, what is the community water system's average annual
household water user cost as a percentage of its median household
income (MHI)? (Enter percentage); 0.003% to 7.18 % of MHI.
General Information:
7. Based on your most currently available data, in total, how many
community water systems does your state have? (Enter number)
55,086 community water systems.
The above data is current as of what date?
01/2001 to 07/2001.
8. Based on your most currently available data, how many small
community water systems, that is serving less than 3,300 persons. does
your state have? (Enter number)
44,973 small (serving less than 3,300 persons) community water
systems.
9. Has your state estimated the total number of community water systems
that are disadvantaged by your state DWSRF program's definition? (Check
one)
[3] Yes- How many disadvantaged community systems are in your state?
(Enter number): 932 disadvantaged community water systems.
[29] No - What is the reason(s) your state has not determined the
number of disadvantaged systems in your state?
[18] Not applicable because state does not have a definition of
disadvantaged.
Comments:
10. Please provide below (or on an additional sheet) any comments that
you have about the DWSRF program or assistance to disadvantaged
communities.
States' comments are reflected in Appendix I.
11. In case we need to follow-up on responses, what are the name,
title, agency, phone number, and e-mail address of the person
completing this questionnaire?
Name:
Title:
Agency:
State:
Phone:
Email address:
Thank you very much for your help!
[End of section]
Appendix III: Comments from EPA‘s Office of Water:
United States Environmental Protection Agency:
Office Of Water:
Washington, D.C. 20460:
January 17, 2002:
John B. Stephenson:
Director, Natural Resources and the Environment:
General Accounting Office:
Washington, DC 20548:
Dear Mr. Stephenson:
Thank you for the opportunity to review the proposed General Accounting
Office (GAO) Report; Drinking Water: Key Aspects of EPA's Revolving
Fund Need to be Strengthened. We understand that GAO staff faced a
significant challenge in working to understand the Drinking Water State
Revolving Fund (DWSRF) program and the related Drinking Water
Infrastructure Needs Survey (DWINS). We appreciate the information in
the report and will give full consideration to your recommendations.
Our detailed comments are outlined below.
Your first charge was to examine the accuracy of the Drinking Water
Infrastructure Needs Survey (DWINS). As you know, EPA went to great
lengths to improve the accuracy of the 1999 survey over the initial
1995 survey by requiring extensive documentation for the over 86,000
reported needs and costs, conducting site visits to small systems, and
performing quality assurance reviews of the responses to the survey
questionnaire. These factors are the basis for the Agency's confidence
in the survey's estimates. The Agency's design of the survey was
affected by the budget and our desire to focus on reducing reporting
bias through site visits. EPA agrees that the calculation of confidence
limits would confirm whether the survey met its precision targets. We
will revisit that issue in the design of the 2003 survey.
Your second charge was to determine the extent to which states have
used the disadvantaged assistance provision. We have no comments on
your findings in this area as they agree with information we have
collected through our information system.
Your third charge was to examine EPA's efforts to monitor
implementation of the DWSRF program. We agree with your findings and
are in the process of implementing many of the practices to which you
refer in your recommendations. It is important to point out that while
the national program was in its fifth year during the course of your
study, it was still relatively early given that many states did not
receive federal funds until the end of the program's second year.
During the first few years of implementation, EPA was focused on
helping state programs get started. The Agency's intent was to move
from a start-up phase to an assessment phase in the fifth and sixth
year of the programs, when most states would have fully implemented
their programs.
The report addresses EPA's slow development of financial indicators for
use in assessing state programs and insufficient use of data in the
program's information system in conducting annual reviews. EPA made a
deliberate decision to delay development of its information system
until after initial program start-up so that the Agency and states
would have a better idea of what information would be important for
program operation and management. The first collection of data was not
finalized until late 2000. In the early years of the program, the
highly variable nature of the data makes it difficult to apply
financial indicators. The indicators become useful and relevant when
the data have a more historical basis. EPA intends to work with its
State/EPA SRF work group to refine and finalize the draft financial
indicators during FY 2002. The Agency will similarly work towards
finalizing programmatic measures of progress.
Similarly, full implementation of our audit program was delayed until
states showed full activity in their revolving funds (i.e., were
receiving repayments). The Office of the Inspector General's plans for
FY 2001 were somewhat delayed due to two extensive audits of state
Clean Water SRF programs that took longer than anticipated, but our
offices still consider the program to be on track for FY 2002. EPA is
pleased that 42 states have elected to conduct independent audits for
their DWSRF programs as a best management practice.
The report also addresses the annual reviews that EPA's regional
offices conduct of each state DWSRF program. These reviews typically
include an on-site visit and a written report to document the results
of the review. We accept your recommendations regarding ways to improve
the quality and timeliness of these reviews, and intend to work closely
with our regional staff in the coming months to determine solutions to
the issues you identified in your investigation.
I appreciate the opportunity to coordinate with your staff on this
project and look forward to the final report. Should you need
additional information or have further questions, please contact me or
Cynthia C. Dougherty, Director of the Office of Ground Water and
Drinking Water at (202) 564-3750.
Sincerely yours,
Signed by:
G. Tracy Mehan:
Assistant Administrator:
[End of section]
Appendix IV: Comments from EPA‘s Office of Inspector General:
United States Environmental Protection Agency:
The Inspector General:
Washington, D.C. 20460:
January 10, 2002:
John B. Stephenson:
Director, Natural Resources and the Environment:
General Accounting Office:
Washington, DC 20548:
Dear Mr. Stephenson:
Thank you for the opportunity to respond to the General Accounting
Office draft report entitled, Drinking Water: Key Aspects of EPA 's
Revolving Fund Oversight Need to be Strengthened. We accept the
recommendations in the report and believe that the Office of Inspector
General's (OIG) current strategy will fully meet the recommendations.
The key element of our strategy is to ensure that states without
Drinking Water State Revolving Fund (DWSRF) audits are examined by the
OIG at least every three years. Currently, eight states require OIG
audits by the end of fiscal 2003. We will add additional resources to
our state revolving fund audit group to ensure that we meet our goal.
The additional resources will also ensure that we issue the DWSRF audit
guide by the end of fiscal 2002. We will continue to evaluate the
quality of audits performed by others.
Should you need additional information or have further questions,
please contact me or call Mr. John T. Walsh, Acting Assistant Inspector
General for Audit, at 202-260-4959.
Sincerely,
Signed by:
Nikki L. Tinsley:
Inspector General:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Ellen M. Crocker:
(617) 565-7469:
Staff Acknowledgments:
Karen Kemper, John Johnson, Lynn Wasielewski, Emma Quach, Karen Bracey,
Teruni Rosengren, Anna Kelley, Luann Moy, Jonathan McMurray, and Karen
Keegan made key contributions to this report.
[End of section]
Footnotes:
[1] Drinking Water Infrastructure Needs Survey: Second Report to the
Congress, EPA 816-R-01-004, Office of Water (February 2001).
[2] Eligible systems include community water systems and not-for-profit
noncommunity water systems. Community water systems serve at least 25
people or 15 connections year-round. Noncommunity water systems serve
at least 25 people for more than 60 days but less than year-round.
[3] Drinking Water Infrastructure Needs Survey Second Report to
Congress, p. 11.
[4] According to EPA, the weighted average interest rate of DWSRF loans
in 2001 was 2.4 percent, or about 3 percent less than the market rates
reported by the states.
[5] The 1996 amendments to the Safe Drinking Water Act defined the term
’disadvantaged community“ to mean the service area of a public water
system that meets affordability criteria established by the state.
[6] By law, states must file annual ’intended use plans“ that provide
detailed information on the projects to be assisted, the criteria for
distributing the assistance, the financial status of the fund, and
other information.
[7] The Single Audit Act, as amended in 1996, established the concept
of replacing multiple grant audits with one audit of a recipient, as a
whole. A single audit is an organization-wide audit that focuses on the
recipient‘s internal controls and its compliance with laws and
regulations governing federal awards. Auditors determine which federal
programs to include in the scope of a single audit based upon the level
of federal expenditures and risk. At a minimum, the audit will cover
all of the major programs receiving significant funding unless the
auditor deems the programs to be low-risk.
[8] Drinking Water Infrastructure Needs Survey Second Report to
Congress, p. 58.
[9] Drinking Water Infrastructure Needs Survey Second Report to
Congress, p. 23.
[10] Sampling error is a measure of the amount of uncertainty that
exists about the true cost when costs are estimated from a sample of
systems rather than from data collected from all systems.
[11] For example, in its current needs assessment, EPA had to rely on
modeling”and substituted the average costs generated by the models”for
67 percent of the capital projects identified in its needs survey,
including over 80 percent of the projects associated with small water
systems. Modeling was necessary because project-specific documentation
was not available in many instances.
[12] In a simple random sample, each system has an equal chance of
being included in the sample.
[13] The workgroup consisted of state, American Indian, Alaskan Native
Village, Indian Health Service, and EPA representatives.
[14] The American Association for Public Opinion Research, ’in the
spirit of upgrading current survey practice,“ has promulgated a list of
best practices that includes reporting a measure of each estimate‘s
precision along with the estimate, rather than reporting only the
statistic itself. In addition, the Council of American Survey Research
Organizations‘ code of standards and ethics requires that estimates of
sampling error be calculated and ’available.“
[15] We used this date because, as part of our analysis, we compared
the states‘ subsidies to disadvantaged communities with the amount of
the states‘ capitalization grants. At the time that we issued our 50-
state questionnaire, the most recent information available on state
capitalization grants was as of December 31, 2000.
[16] States may extend the loan repayment period from the standard 20
years to up to 30 years, provided that the repayment period does not
exceed the expected design life of the project. While an extended loan
term makes financing a project more affordable to a community by
reducing the amount of monthly payments, it is not considered a loan
subsidy.
[17] The standard DWSRF interest rate offered to loan applicants varies
by state, but must be at or below the current market rate.
[18] Although 21 states offer subsidy assistance in their disadvantaged
community programs, only 14 states have actually forgiven a portion of
the loan principal or reduced the loan interest rate below zero
percent.
[19] According to EPA‘s report National-Level Affordability Criteria
Under the 1996 Amendments to the Safe Drinking Water Act (Aug. 31,
2000), the average American household typically spends 0.7 percent of
its income on water.
[20] The state of Utah also has an income-based criterion, but the
state uses the median adjusted gross income rather than household
income.
[21] Arizona defines a small community as one with a population of
10,000 or less. Virginia defines a small community as one with a
population of 3,300 or less.
[22] Our responses do not add to 12 because some states cited the
availability of both federal and state funding as reasons for not using
their DWSRF to assist disadvantaged communities.
[23] Water Infrastructure: Information on Federal and State Financial
Assistance [hyperlink, http://www.gao.gov/products/GAO-02-134], Nov.
30, 2001.
[24] Currently, the system contains information covering the period
from July 1, 1997, through June 30, 2001.
[25] Under the 1996 amendments, states must give priority, to the
maximum extent practicable, to funding projects that (1) address the
most serious risk to human health, (2) are necessary to ensure
compliance with the requirements of the Safe Drinking Water Act, and
(3) assist systems most in need, on a per household basis, according to
a state‘s affordability criteria.
[26] This schedule applies in the years that a biennial report is due.
EPA‘s DWSRF guidance indicates that the review should be conducted on
approximately the same date in the ’off years“ when a biennial report
is not due.
[27] Two problems identified in the Notice of Noncompliance were slow
progress in committing loan funds and inadequate staffing levels. EPA
headquarters officials told us a visit was made during 2000, and a
draft PER was provided to the state in April 2001. Officials say that
the problems have now been resolved, but the draft has not been
finalized, based on a management decision.
[28] Annual Review Guide Drinking Water State Revolving Fund, U.S.
Environmental Protection Agency, March 1999.
[29] Annual Review Guide Drinking Water State Revolving Fund, p.12.
[30] Although we found a total of 29 reports that described the scope
in very general terms, 14 of these reports used a checklist approach or
organized the report in such a way that its users could infer which
specific program elements were covered in the annual review.
[31] As of October 2001, headquarters officials had completed their
reviews and issued draft reports for 2 of the 10 regional offices.
[32] In November 1996, after a year of discussions with EPA‘s Office of
Water and Office of Wastewater Management, the Inspector General and
the program offices reached agreement on an audit strategy for the
Clean Water State Revolving Fund Program. Following the authorization
of a DWSRF and discussions with EPA‘s Office of Ground Water and
Drinking Water and others, the audit strategy was revised to include
the DWSRF program about a year later.
[33] Ten states have not completed an independent audit: Hawaii,
Missouri, Nevada, New Hampshire, Oregon, South Carolina, Tennessee,
Texas, Utah, and Washington. According to EPA officials, however,
Hawaii is now in the process of conducting its first independent audit.
In addition, Inspector General officials determined that the financial
review done in conjunction with the Single Audit Act in Texas was
sufficiently detailed to make it an acceptable substitute for an
independent audit.
[34] Over the past 8 to 10 months, OIG officials reviewed seven audit
reports covering state fiscal year 2000, two covering state fiscal year
1999, and one for state fiscal year 1998.
[35] The OMB Circular A-133 (issued pursuant to the Single Audit Act,
P.L. 98-502, and the Single Audit Act Amendments of 1996, P.L. 104-156)
sets forth standards for obtaining consistency and uniformity among
federal agencies for the audit of states, local governments, and non-
profit organizations expending federal awards. A compliance supplement
was issued to this circular in March 2000 to address specific DWSRF
reporting requirements.
[36] In developing our estimate, we used the weights assigned by EPA to
each of the systems included in its needs assessment sample. We did not
independently verify the accuracy of these weights. The weight assigned
to a system indicated the number of small systems nationwide that the
system represented. Thus, the sum of the weights of all sampled systems
represents all small systems in the 50 states. Similarly, by totaling
the weights assigned to the sampled systems that the states identified
as being disadvantaged, we could develop an estimate of the number of
disadvantaged systems among the 24,342 systems represented by the
responses to our survey.
[37] A copy of the questionnaire with a summary of the states‘
responses is included in appendix II.
[38] To be considered ’disadvantaged“ in Utah, a community‘s median
adjusted gross income must be equal to or less than 80 percent of the
state‘s median adjusted gross income.
[39] In total, 591 of the systems in EPA‘s sample were located in the
50 states. The others were in Puerto Rico and the U.S. Virgin Islands.
[40] For the purpose of this analysis, we established surrogate
criteria; to qualify as ’disadvantaged,“ a community‘s water rates
would have to exceed 1.4 percent of its median household income.
[41] Another way of looking at this is to compare the number of systems
estimated to be disadvantaged (6,925) with the total number of small
systems (44,373). Using this approach, we could conclude that the
minimum percentage of ’disadvantaged“ systems would be about 16
percent.
[42] EPA‘s requirement that systems from every state, Puerto Rico, and
the U.S. Virgin Islands be included in its sample of small water
systems complicated the calculation of the sampling error in the needs
estimate for these systems. For example, to use the appropriate
statistical formulas for calculating sampling error, EPA‘s sample would
have to have included systems from at least two geographical areas
within each state or territory. However, at least 10 states or
territories had only one geographical area from which systems were
sampled. Although statisticians have developed a way to approximate
sampling error when this situation occurs, using it requires each state
with only one geographical area to be grouped with a ’similar“ state.
Thus, assumptions must be made about which states are similar, and
criteria for making such assumptions were not readily available.
[43] Of the 31 states with disadvantaged programs, only 29 states have
definitions of a disadvantaged community. Three states without programs
have disadvantaged definitions.
[44] There are 33 responses because 1) while Indiana and Tennessee have
no clear definition of disadvantaged, the states answered "same as
affordability criteria", 2) Nevada has a definition of disadvantaged
but answered it had no affordability criteria with which to compare its
definition.
Alaska's definition was included because it was used in the past to
qualify applicants for principal forgiveness, even though Alaska DWSRF
has opted not to provide principal forgiveness to future applicants.
[End of section]
GAO‘s Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO‘s commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO‘s Web site [hyperlink,
http://www.gao.gov] contains abstracts and full text files of current
reports and testimony and an expanding archive of older products. The
Web site features a search engine to help you locate documents using
key words and phrases. You can print these documents in their entirety,
including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as ’Today‘s Reports,“ on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
[hyperlink, http://www.gao.gov] and select ’Subscribe to daily E-mail
alert for newly released products“ under the GAO Reports heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov:
(202) 512-4800:
U.S. General Accounting Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
