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Testimony: 

Before the Committee on Transportation and Infrastructure, House of 
Representatives: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EST:
Wednesday, May 26, 2010: 

Recovery Act: 

Clean Water Projects Are Underway, but Procedures May Not Be in Place 
to Ensure Adequate Oversight: 

Statement of David C. Trimble, Acting Director: 
Natural Resources and Environment: 

GAO-10-761T: 

GAO Highlights: 

Highlights of GAO-10-761T, testimony before the Committee on 
Transportation and Infrastructure, House of Representatives. 

Why GAO Did This Study: 

The American Recovery and Reinvestment Act of 2009 (Recovery Act) 
included $4 billion for the Environmental Protection Agency’s (EPA) 
Clean Water State Revolving Fund (SRF). This testimony—based on GAO’s 
report GAO-10-604, issued on May 26, 2010, in response to a mandate 
under the Recovery Act—addresses (1) state efforts to meet 
requirements associated with the Recovery Act and SRF program, (2) the 
uses of Recovery Act funds, and (3) EPA’s and states’ efforts to 
oversee the use of these funds. 

GAO’s review of the Clean Water SRF program focused on 14 states and 
selected localities—known as subrecipients—in each of these states. 
These 14 states received approximately 50 percent of the total 
appropriated under the Recovery Act for the Clean Water SRF. GAO 
obtained data from EPA and the 14 states, including the amounts and 
types of financial assistance each SRF program provided, which 
subrecipients were first-time recipients of Clean Water SRF funding, 
and which projects serve disadvantaged communities. 

What GAO Found: 

The 14 states we reviewed for the Clean Water SRF program had all 
projects under contract by the 1-year, February 17, 2010, deadline and 
also took steps to give priority to projects that were ready to 
proceed to construction by that same date. Eighty-seven percent of 
Clean Water SRF projects were under construction within 12 months of 
enactment of the Recovery Act. In addition, the 14 Clean Water SRFs 
exceeded the 20 percent green reserve requirement, using 29 percent of 
SRF funds to provide assistance for projects that met EPA criteria for 
being “green,” such as water or energy efficiency projects; these 
states also met or exceeded the requirement to use at least 50 percent 
of Recovery Act funds to provide additional subsidization in the form 
of, for example, principal forgiveness or grants. SRF officials in 
most of the states we reviewed said that they faced challenges in 
meeting Recovery Act requirements, including the increased number of 
applications needing review and the number of new subrecipients 
requiring additional support in complying with the SRF program and 
Recovery Act requirements. States used a variety of techniques to 
address these concerns to meet the 1-year deadline, such as hiring 
additional staff to help administer the SRF program. 

The 14 states we reviewed distributed nearly $2 billion in Recovery 
Act funds among 890 water projects through their Clean Water SRF 
program. Overall, these 14 states distributed about 79 percent of 
their funds as additional subsidization, with most of the remaining 
funds provided as low- or zero-interest loans that will recycle back 
into the programs as subrecipients repay their loans. In addition, 
states we reviewed used at least 40 percent of Clean Water SRF 
Recovery Act project funds ($787 million) to provide assistance for 
projects that serve disadvantaged communities, and almost all of this 
funding was provided in the form of additional subsidization. Almost 
half of the Clean Water SRF subrecipients had never previously 
received assistance through that program. Of the 890 projects awarded 
Recovery Act Clean Water SRF program funds in these states, more than 
one-third are for green projects, and almost all of these (93 percent) 
were awarded additional subsidization. 

EPA has modified its existing oversight of state SRF programs by 
planning additional performance reviews beyond the annual reviews it 
already conducts, but these reviews do not include an examination of 
state subrecipient monitoring procedures. According to EPA officials, 
EPA has not established new subrecipient monitoring requirements for 
Recovery Act-funded projects and has given states a high degree of 
flexibility to operate their SRF programs based on each state’s unique 
needs. Although many states have expanded their existing monitoring 
procedures, the oversight procedures in some states may not be 
sufficient given that (1) federal funds awarded to each state under 
the Recovery Act have increased as compared with average annual 
awards; (2) all Recovery Act projects had to be under contract within 
1 year; and (3) EPA and states had little experience with some new 
Recovery Act requirements, such as the Buy American requirements. For 
example, some projects have been completed before any site inspection 
has occurred. 

What GAO Recommends: 

GAO-10-604 recommended that the EPA Administrator work with the states 
to implement specific oversight procedures to monitor and ensure 
subrecipients’ compliance with the provisions of the Recovery Act-
funded Clean Water SRF program. EPA neither agreed nor disagreed with 
our recommendation. 

View [hyperlink, http://www.gao.gov/products/GAO-10-761T] or key 
components. For more information, contact David C. Trimble at (202) 
512-3841 or trimbled@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss our work examining selected 
states' use of funds made available for clean water projects under the 
American Recovery and Reinvestment Act of 2009 (Recovery Act). 
[Footnote 1] Congress and the administration have fashioned a 
significant response to what is generally considered to be the 
nation's most serious economic crisis since the Great Depression. The 
Recovery Act's combined spending and tax provisions are estimated to 
cost $787 billion, including $4 billion for the Environmental 
Protection Agency's (EPA) Clean Water State Revolving Fund (SRF). The 
Recovery Act specified several roles for us, including conducting 
ongoing reviews of selected states' and localities' use of funds made 
available under the act. We recently completed our sixth review, being 
issued today, which examined a core group of 16 states, the District 
of Columbia, and selected localities.[Footnote 2] One component of 
this review focused on the Clean Water SRF program in 14 of those 
states and selected localities--known as subrecipients--in each of 
these states.[Footnote 3] These 14 states received approximately 50 
percent of the total amount appropriated for the Clean Water SRF. 

My statement today is based on this work as it relates to the Clean 
Water SRF program's use of Recovery Act funds and addresses (1) state 
efforts to meet requirements associated with the Recovery Act, (2) the 
uses of Recovery Act funds, and (3) EPA's and states' efforts to 
oversee the use of these funds. We obtained data from EPA's Clean 
Water SRF Benefits Reporting system as well as each of the 14 states 
in our review, including the amounts and types of financial assistance 
that each SRF program provided using Recovery Act funds, the type of 
Clean Water SRF projects funded, the contract completion and 
construction start dates for these projects, which subrecipients were 
first-time recipients of the Clean Water SRF program, and which 
projects serve disadvantaged communities. We also reviewed relevant 
regulations and federal guidance and interviewed EPA officials that 
administer the programs in headquarters and 4 of the 10 EPA regions. 
[Footnote 4] In addition, we conducted semistructured interviews with 
state officials who administer the SRF programs and with subrecipients 
who received Recovery Act funds. We conducted performance audits for 
this review from November 2009 to May 2010 in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

The Recovery Act appropriated $4 billion for the Clean Water SRF 
program.[Footnote 5] This funding represents a significant increase 
compared with federal funds awarded as annual appropriations to the 
SRF program in recent years. From fiscal years 2000 through 2009, 
annual appropriations averaged about $1.1 billion for the Clean Water 
SRF program. Established in 1987, EPA's Clean Water SRF program 
provides states and local communities independent and permanent 
sources of subsidized financial assistance, such as low-or no-interest 
loans for projects that protect or improve water quality and that are 
needed to comply with federal water quality regulations. 

In addition to providing increased funds, the Recovery Act included 
some new requirements for the SRF programs. For example, states were 
required to have all Recovery Act funds awarded to projects under 
contract within 1-year of enactment--which was February 17, 2010 
[Footnote 6]--and EPA was directed to reallocate any funds not under 
contract by that date.[Footnote 7] In addition, under the Recovery 
Act, states should give priority to projects that were ready to 
proceed to construction within 12 months of enactment. States were 
also required to use at least 20 percent of funds as a "green reserve" 
to provide assistance for green infrastructure projects, water or 
energy efficiency improvements, or other environmentally innovative 
activities. Further, states were required to use at least 50 percent 
of Recovery Act funds to provide assistance in the form of, for 
example, principal forgiveness or grants. These types of assistance 
are referred to as additional subsidization and are more generous than 
the low-or no-interest loans that the Clean Water SRF programs 
generally provide. 

Despite Challenges, States Met Recovery Act Requirements for the SRFs: 

The 14 states we reviewed for the Clean Water SRF program met all 
Recovery Act requirements specific to the Clean Water SRF. 
Specifically, the states we reviewed had all projects under contract 
by the 1-year deadline and also took steps to give priority to 
projects that were ready to proceed to construction within 12 months 
of enactment of the Recovery Act. Eighty-seven percent of Clean Water 
SRF projects were under construction within 12 months of enactment. In 
addition, the 14 Clean Water SRFs we reviewed exceeded the 20 percent 
green reserve requirement, using 29 percent of Recovery Act SRF funds 
in these states to provide assistance for projects that met EPA 
criteria for the green reserve. These states also met or exceeded the 
50 percent additional subsidization requirement; overall, the 14 
states distributed a total of 79 percent of Recovery Act Clean Water 
SRF funds as additional subsidization. 

SRF officials in most of the states we reviewed said that they faced 
challenges in meeting Recovery Act requirements, especially the 1-year 
contracting deadline. Under the base program, it could take up to 
several years from when funds are awarded before the loan agreement is 
signed, according to EPA officials. Some SRF officials told us that 
the compressed time frame imposed by the Recovery Act posed challenges 
and that their workloads increased significantly as a result of the 1-
year deadline. Among the factors affecting workload are the following: 

* Reviewing applications for Recovery Act funds was burdensome. 
Officials in some states said that the number of applications 
increased significantly, in some cases more than doubling compared 
with prior years, and that reviewing these applications was a 
challenge. For example, New Jersey received twice as many applications 
than in past years, according to SRF officials in that state. 

* Explaining new Recovery Act requirements was time-consuming. Because 
projects that receive any Recovery Act funds must comply with Buy 
American requirements and Davis-Bacon wage requirements,[Footnote 8] 
state SRF officials had to take additional steps to ensure that both 
applicants for Recovery Act funds and those awarded Recovery Act funds 
understood these requirements. 

* Applicants and subrecipients required additional support. Many 
states took steps to target Recovery Act funds to new recipients, 
including nontraditional recipients of Clean Water SRF funds, such as 
disadvantaged communities.[Footnote 9] According to SRF officials in 
some states, new applicants and subrecipients required additional 
support in complying with SRF program and Recovery Act requirements. 
In the states we reviewed, nearly half of Clean Water SRF 
subrecipients had not previously received assistance through that 
program. 

* Project costs were difficult to predict. Officials in some states 
told us that actual costs were lower than estimated for many projects 
awarded Recovery Act funds and, as a result, some states had to 
scramble to ensure that all Recovery Act funds were under contract by 
the 1-year deadline. For example, in January 2010, officials from 
Florida's SRF programs told us that a few contracts for Recovery Act- 
funded projects in the state had come in below their original project 
cost estimates, and that this was likely to be the program staff's 
largest concern as the deadline approached. However, lower estimates 
also allowed some states to undertake additional projects that they 
would otherwise have been unable to fund with the Recovery Act funding. 

States used a variety of techniques to address these workload concerns 
and meet the 1-year contracting deadline, according to state SRF 
officials with whom we spoke. Some states hired additional staff to 
help administer the SRF programs, although SRF officials in other 
states told us that they were unable to do so because of resource 
constraints. For example, New Jersey hired contractors to help 
administer the state's base Clean Water SRF funds, allowing 
experienced staff to focus on meeting Recovery Act requirements, 
according to SRF officials in that state. Moreover, some states hired 
contractors to provide assistance to both applicants and 
subrecipients. For example, California hired contractors--including 
the Rural Community Assistance Corporation--to help communities apply 
for Recovery Act funds. Furthermore, states took steps to ensure that 
they would have all Recovery Act funds under contract even if projects 
dropped out because of Recovery Act requirements or time frames. For 
example, most of the states we reviewed awarded a combination of 
Recovery Act and base funds to projects to allow for more flexibility 
in shifting Recovery Act funds among projects. 

States also used a variety of techniques to ensure that they would 
meet the green reserve requirement. For example, some of the states we 
reviewed conducted outreach to communities and nonprofit organizations 
to solicit applications for green projects. Moreover, to make green 
projects more attractive to communities, some states offered 
additional subsidization to all green projects or relied on a small 
number of high-cost green projects to meet the requirement. For 
example, Mississippi officials told us that the state funded three 
large energy efficiency projects that helped the state's Clean Water 
SRF program meet the green reserve requirement. 

Recovery Act Funds Went to Many Disadvantaged Communities and New 
Recipients: 

The 14 states we reviewed distributed nearly $2 billion in Recovery 
Act funds among 890 water projects through their Clean Water SRF 
program. These states took a variety of approaches to distributing 
funds. For example, four states distributed at least 95 percent of 
Recovery Act funds as additional subsidization, while three other 
states distributed only 50 percent as additional subsidization, the 
smallest amount permitted under the Recovery Act. Overall, these 14 
states distributed approximately 79 percent of Clean Water SRF 
Recovery Act funds as additional subsidization, with most of the 
remaining funds provided as low-or no-interest loans that will recycle 
back into the programs as subrecipients repay their loans. As the 
funds are repaid, they can then be used to provide assistance to SRF 
recipients in the future. Furthermore, states varied in the number of 
projects they chose to fund. For example, Ohio distributed 
approximately $221 million among 274 Clean Water SRF projects, while 
Texas distributed more than $172 million among 21 projects. Some 
states funded more projects than originally anticipated because other 
projects were less costly than expected, according to officials. For 
example, Texas was able to provide funds for two additional clean 
water projects because costs--especially material costs--were lower 
than anticipated for other projects. 

States we reviewed used at least 40 percent of Recovery Act Clean 
Water SRF project funds ($787 million) to provide assistance for 
projects that serve disadvantaged communities.[Footnote 10] Most of 
the states we reviewed took steps to target some or all Recovery Act 
funds to these low-income communities, generally by considering a 
community's median household income when selecting projects and 
determining which projects would receive additional subsidization in 
the form of principal forgiveness, negative interest loans, or grants. 
According to state officials from nine Clean Water SRF programs, 50 
percent of all projects funded by those states' SRF programs serve 
disadvantaged communities, and all of these disadvantaged communities 
were provided with additional subsidization. SRF officials in some 
states told us that Recovery Act funds--especially in the form of 
additional subsidization--have provided significant benefits to 
disadvantaged communities in their states. For example, according to 
officials from California's Clean Water SRF program, that state used 
funds to provide assistance for 25 wastewater projects that serve 
disadvantaged communities, and approximately half of these projects 
would not have gone forward as quickly or at all without additional 
subsidization. Officials from the City of Fresno confirmed that one of 
these projects--which will replace septic systems with connections to 
the city's sewer systems in two disadvantaged communities--would not 
have gone forward without additional subsidization. Local officials 
told us that this project will decrease the amount of nitrates in the 
region's groundwater, which is the source of the city's drinking water. 

The Clean Water SRF programs from the 14 states we reviewed used 
Recovery Act funds to provide assistance for 890 projects that will 
meet a variety of local needs. Figure 1 shows how the 14 states 
distributed Recovery Act funds across various clean water categories. 

Figure 1: Share of Recovery Act Funds Provided to Clean Water SRF 
Projects in 14 States, by Category: 

[Refer to PDF for image: pie-chart] 

Secondary treatment: 34%; 
Sanitary sewer overflow: 18%; 
New sewers: 12%; 
Advanced treatment: 12%; 
Nonpoint source projects: 8%; 
Combined sewer overflow: 7%; 
Storm water sewers: 3%; 
Recycled water distribution: 2%; 
Other[A]: 4%. 

Source: GAO analysis of EPA data and information provided by states. 

[A] Three states--California, Massachusetts, and Texas--reported 
awarding Recovery Act funds to other types of Clean Water SRF projects 
or project components. These projects include, for example, expanding 
a disposal system, constructing a reclaimed water delivery system, and 
constructing a wind turbine. 

[End of figure] 

In the states we reviewed, the Clean Water SRF programs used more than 
70 percent of Recovery Act project funds to provide assistance for 
projects in the following categories: 

* Secondary treatment and advanced treatment. States we reviewed used 
nearly half of all Recovery Act project funds to support wastewater 
infrastructure intended to meet or exceed EPA's secondary treatment 
standards for wastewater treatment facilities. Projects intended to 
achieve compliance with these standards are referred to as secondary 
treatment projects, while projects intended to exceed compliance with 
these standards are referred to as advanced treatment projects. For 
example, Massachusetts' Clean Water SRF program awarded over $2 
million in Recovery Act funds to provide upgrades intended to help the 
City of Leominster's secondary wastewater treatment facility achieve 
compliance with EPA's discharge limits for phosphorous. 

* Sanitary sewer overflow and combined sewer overflow. States we 
reviewed used about 25 percent of Recovery Act project funds to 
support efforts to prevent or mitigate discharges of untreated 
wastewater into nearby water bodies. Such sewer overflows, which can 
occur as a result of inclement weather, can pose significant public 
health and pollution problems, according to EPA. For example, 
Pennsylvania used 56 percent of project funds to address sewer 
overflows from municipal sanitary sewer systems and combined sewer 
systems.[Footnote 11] In another example, Iowa's Clean Water SRF 
program used Recovery Act funds to help the City of Garwin implement 
sanitary sewer improvements. Officials from that city told us that 
during heavy rains, untreated water has bypassed the city's pump 
station and backed up into basements of homes and businesses, and that 
the city expects all backups to be eliminated as a result of planned 
improvements. 

In addition to funding conventional wastewater treatment projects, 9 
of the 14 Clean Water SRF programs we reviewed used Recovery Act funds 
to provide assistance for projects intended to address nonpoint source 
pollution--projects intended to protect or improve water quality by, 
for example, controlling runoff from city streets and agricultural 
areas. The Clean Water SRF programs we reviewed used 8 percent of 
project funds to support these nonpoint source projects, but nonpoint 
source projects account for 20 percent (179 out of 890) of all 
projects. A large number of these projects--131 out of 179--were 
initiated by California or Ohio. For example, California used Recovery 
Act funds to provide assistance for the Tomales Bay Wetland 
Restoration and Monitoring Program, which restores wetlands that had 
been converted into a dairy farm. Figure 2 shows the number of 
projects that fall into various clean water categories. 

Figure 2: Clean Water SRF Projects Awarded Recovery Act Funds in 14 
States, by Category: 

[Refer to PDF for image: vertical bar graph] 

Category: Sanitary sewer overflow; 
Number of projects: 244. 

Category: Secondary treatment; 
Number of projects: 201. 

Category: Nonpoint source projects; 
Number of projects: 179. 

Category: New sewers; 
Number of projects: 140. 

Category: Advanced treatment; 
Number of projects: 106. 

Category: Combined sewer overflow; 
Number of projects: 54. 

Category: Storm water sewers; 
Number of projects: 47. 

Category: Other[A]; 
Number of projects: 16. 

Category: Recycled water distribution; 
Number of projects: 13. 

Source: GAO analysis of EPA data and information provided by states. 

Note: Some projects fall into more than one category. 

[A] Three states--California, Massachusetts, and Texas--reported 
awarding Recovery Act funds to other types of Clean Water SRF projects 
or project components. These projects include, for example, expanding 
a disposal system, constructing a reclaimed water delivery system, and 
constructing a wind turbine. 

[End of figure] 

Of the 890 projects awarded Recovery Act funds by the Clean Water SRF 
programs in the states we reviewed, more than one-third (312) address 
the green reserve requirement. Of these green projects, 289 (93 
percent) were awarded additional subsidization. Figure 3 shows the 
number of projects that fall into each of the four green reserve 
categories included in the Recovery Act. Many of these projects are 
intended to improve energy efficiency and are expected to result in 
long-term cost savings for some communities as a result of these 
improvements. For example, the Massachusetts Water Resources Authority 
is using Recovery Act funds provided through that state's Clean Water 
SRF program to help construct a wind turbine at the DeLauri Pump 
Station, and the Authority estimates that, as a result of this wind 
turbine, more than $350,000 each year in electricity purchases will be 
avoided. Furthermore, some projects provide green alternatives for 
infrastructure improvements. For example, New York's Clean Water SRF 
program provided Recovery Act funds to help construct a park designed 
to naturally filter stormwater runoff and reduce the amount of 
stormwater that enters New York City's sewers. More than half of the 
city's sewers are combined sewers, and during heavy rains, sewage 
sometimes discharges into Paerdagat Basin, which feeds into Jamaica 
Bay. 

Figure 3: Green Reserve Projects Awarded Recovery Act Clean Water SRF 
Program Funds in 14 States, by Category: 

[Refer to PDF for image: vertical bar graph] 

Category: Green infrastructure; 
Number of projects: 128; 
Funding: $165 million. 

Category: Energy efficiency; 
Number of projects: 117; 
Funding: $320 million. 

Category: Water efficiency; 
Number of projects: 30; 
Funding: $36.5 million. 

Category: Environmentally innovative; 
Number of projects: 65; 
Funding: $68.5 million. 

Source: GAO analysis of EPA data and information provided by states. 

Note: Some projects fall into more than one category. 

[End of figure] 

Although EPA and States Have Expanded Existing Oversight Procedures to 
Address Recovery Act Requirements, the Procedures May Not Ensure 
Adequate Oversight: 

EPA has modified its existing oversight of state SRF programs by 
planning additional performance reviews beyond the annual reviews it 
is already conducting, but these reviews do not include an examination 
of state subrecipient monitoring procedures. Specifically, EPA is 
conducting midyear and end-of-year Recovery Act reviews in fiscal year 
2010 to assess how each state is meeting Recovery Act requirements. As 
part of these reviews, EPA has modified its annual review checklist to 
incorporate elements that address the Recovery Act requirements. 
Further, EPA officials will review four project files in each state 
for compliance with Recovery Act requirements and four federal 
disbursements to the state to help ensure erroneous payments are not 
occurring. According to EPA officials, through these added reviews, 
EPA is providing additional scrutiny over how states are using the 
Recovery Act funds and meeting Recovery Act requirements as compared 
with base program funds. As of May 14, 2010, EPA completed field work 
for its mid-year Recovery Act reviews in 13 of the states we reviewed 
and completed final reports for 3 of these states (Iowa, Ohio, and 
Pennsylvania). EPA has plans to begin field work in the final state at 
the end of May 2010. 

Although the frequency of reviews has increased, these reviews do not 
examine state subrecipient monitoring procedures. In 2008, the EPA 
Office of Inspector General (OIG) examined state SRF programs' 
compliance with subrecipient monitoring requirements of the Single 
Audit Act and found that states complied with the subrecipient 
monitoring requirements but that EPA's annual review process did not 
address state subrecipient monitoring procedures. The OIG suggested 
that EPA include a review of how states monitor borrowers as part of 
its annual review procedures. EPA officials told us that they agreed 
with the idea to include a review of subrecipient monitoring 
procedures as part of the annual review but have not had time to 
implement this suggestion because EPA's SRF program officials have 
focused most of their attention on the Recovery Act since the OIG 
published its report. EPA officials also told us that they believe the 
reviews of project files and federal disbursements could possibly 
identify internal control weaknesses that may exist for financial 
controls, such as weaknesses in subrecipient monitoring procedures. 
These reviews occur as part of the Recovery Act review and aim to 
assess a project's compliance with Recovery Act requirements and help 
ensure that no erroneous payments are occurring. 

In terms of state oversight of subrecipients, EPA has not established 
new subrecipient monitoring requirements for Recovery Act-funded 
projects, according to EPA officials. Under the base Clean Water SRF 
program, EPA gives states a high degree of flexibility to operate 
their SRF programs based on each state's unique needs and 
circumstances in accordance with federal and state laws and 
requirements. According to EPA officials, although EPA has established 
minimum requirements for subrecipient monitoring, such as requiring 
states to review reimbursement requests, states are allowed to 
determine their own subrecipient monitoring procedures, including the 
frequency of project site inspections. 

While EPA has not deviated from this approach with regard to 
monitoring Recovery Act-funded projects, it has provided states with 
voluntary tools and guidance to help with monitoring efforts. For 
example, EPA provided states with an optional inspection checklist to 
help states evaluate a subrecipient's compliance with Recovery Act 
requirements, such as the Buy American and job reporting requirements. 
EPA has also provided training for states on the Recovery Act 
requirements. For example, as of May 14, 2010, EPA has made available 
11 on-line training sessions (i.e.webcasts) for state officials in all 
states to help them understand the Recovery Act requirements. EPA has 
also provided four workshops with on-site training on its inspection 
checklist for state officials in California, Louisiana, New Mexico, 
and Puerto Rico. 

Although EPA has not required that states change their subrecipient 
oversight approach, many states have expanded their existing 
monitoring procedures in a variety of ways. However, the oversight 
procedures may not be sufficient given that (1) federal funds awarded 
to each state under the Recovery Act have increased as compared with 
average annually awarded amounts; (2) all Recovery Act projects had to 
be ready to proceed to construction more quickly than projects funded 
with base SRF funds; and (3) EPA and states had little previous 
experience with some of the Recovery Act's new requirements, such as 
Buy American provisions, according to EPA officials. The following are 
ways in which oversight procedures may not be sufficient: 

* Review procedures for job data. According to OMB guidance on 
Recovery Act reporting, states should establish internal controls to 
ensure data quality, completeness, accuracy, and timely reporting of 
all amounts funded by the Recovery Act. We found that most states we 
reviewed had not developed review procedures to verify the accuracy of 
job figures reported by subrecipients using supporting documentation, 
such as certified payroll records. As a result, states may be unable 
to verify the accuracy of these figures. For example, Mississippi SRF 
officials told us that they do not have the resources to validate the 
job counts reported by comparing them against certified payroll 
records. In addition, during interviews with some subrecipients, we 
found inconsistencies among subrecipients on the types of hours that 
should be included and the extent that they verified job data 
submitted to them by contractors. For example, in New Jersey one 
subrecipient told us they included hours worked by the project 
engineer in the job counts, while another subrecipient did not. 

* Review procedures for loan disbursements. According to EPA 
officials, the agency requires states to verify that all loan payments 
and construction reimbursements are for eligible program costs. In 
addition, according to EPA guidance, states often involve technical 
staff who are directly involved in construction inspections to help 
verify disbursement requests because they have additional information, 
such as the status of construction, that can help accurately approve 
these requests. However, we found that in two states we reviewed, 
technical or engineering staff did not review documentation supporting 
reimbursement requests from the subrecipient to ensure they were for 
legitimate project costs. For example, officials in Pennsylvania told 
us that technical staff from the state's Department of Environmental 
Protection--which provides technical assistance to SRF subrecipients-- 
do not verify monthly payments to subrecipients that are made by the 
Pennsylvania Infrastructure Investment Authority, the state agency 
with funds management responsibility for the state's SRF programs. 
Instead, Department of Environmental Protection staff approve project 
cost estimates prior to loan settlement, when they review bid 
proposals submitted by contractors, and Pennsylvania Infrastructure 
Investment Authority officials verify monthly payments against the 
approved cost estimates. 

* Inspection procedures. According to EPA officials, the agency 
requires that SRF programs have procedures to help ensure 
subrecipients are using Recovery Act SRF funding for eligible 
purposes. While EPA has not established required procedures for state 
project inspections, it has provided states its optional Recovery Act 
inspection checklist to help them evaluate a subrecipient's compliance 
with Recovery Act requirements, such as the Buy American and job 
reporting requirements. Some states we reviewed have adopted EPA's 
Recovery Act inspection checklist procedures and modified their 
procedures accordingly. For example, California and Arizona plan to 
implement all elements of EPA's checklist for conducting inspections 
of Recovery Act projects, according to officials in these states. 
Other states have modified their existing inspection procedures to 
account for the new Recovery Act requirements. For example, officials 
from Georgia said they added visual examination of purchased materials 
and file review steps to their monthly inspections to verify that 
subrecipients are complying with the Buy American provision. In 
contrast, the Pennsylvania Department of Environmental Protection's 
inspection procedures do not include a review of Recovery Act 
requirements. For example, we found that inspection reports for three 
Recovery Act projects we visited in Pennsylvania do not include 
inspection elements that covered Davis-Bacon or Buy American 
provisions. Instead, the Pennsylvania Infrastructure Investment 
Authority requires subrecipients to self-certify their compliance with 
these Recovery Act requirements when requesting payment from the 
state's funds disbursement system. Registered professional engineers 
who work for the subrecipients must sign off on these self-
certifications and subrecipients could face loss of funds if a 
certification is subsequently found to be false, according to the 
Executive Director of the Authority. 

* Frequency and timing of inspections. According to EPA officials, the 
agency does not have requirements on how often a state SRF program 
must complete project inspections, and the frequency and complexity of 
inspections vary by state for the base SRF program. Officials from 
several states told us they have increased the frequency of project 
site inspections. For example, Colorado SRF officials said the state 
is conducting quarterly project site inspections of each of the 
state's Recovery Act funded SRF projects, whereas under the state's 
base SRF programs, Colorado inspects project sites during construction 
only when the state has concerns. However, we found that two states 
either did not conduct site inspections of some projects that are 
complete or had not yet inspected projects that were near completion. 
For example, as of April 19, 2010, Ohio EPA had inspected about 41 
percent of its Clean Water SRF projects, but our review of Ohio's 
inspection records showed that at least 6 projects are complete and 
have not been inspected, and a number of others are nearing completion 
and have not been inspected. 

* Monitoring compliance with Recovery Act requirements. We found 
issues in several states during interviews with SRF subrecipients that 
suggest uncertainty about subrecipients' compliance with Recovery Act 
requirements. For example, we interviewed one subrecipient in Ohio 
whose documentation of Buy American compliance raised questions as to 
whether all of the manufactured goods used in its project were 
produced domestically. In particular, the specificity and detail of 
the documentation provided about one of the products used left 
questions as to whether it was produced at one of the manufacturer's 
nondomestic locations. Further, another subrecipient in Ohio was 
almost 2 months late in conducting interviews of contractor employees 
to ensure payment of Davis-Bacon wages. 

In summary, EPA and the states successfully met the Recovery Act 
deadlines for having all projects under contract by the 1-year 
deadline, and almost all Clean Water SRF projects were under 
construction by that date as well. Furthermore, Recovery Act funds 
were distributed to many new recipients and supported projects that 
serve disadvantaged communities. In addition, Recovery Act Clean Water 
SRF program funds have supported a variety of projects that are 
expected to provide tangible benefits to improving local water 
quality. However, as demonstrated in the above examples, the oversight 
mechanisms used by EPA and the states may not be sufficient to ensure 
compliance with all Recovery Act requirements. The combination of a 
large increase in program funding, compressed time frames, and new 
Recovery Act requirements present a significant challenge to EPA's 
current oversight approach. As a result, we recommended that the EPA 
Administrator work with the states to implement specific oversight 
procedures to monitor and ensure subrecipients' compliance with the 
provisions of the Recovery Act-funded Clean Water and Drinking Water 
SRF programs. EPA neither agreed nor disagreed with this 
recommendation. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other Members of the Committee 
might have. 

GAO Contact and Staff Acknowledgments: 

For further information regarding this statement, please contact David 
C. Trimble at (202) 512-3841 or trimbled@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this statement. Individuals who made key 
contributions to this statement include Nancy Crothers, Elizabeth 
Erdmann, Brian M. Friedman, Gary C. Guggolz, Emily Hanawalt, Carol 
Kolarik, and Jonathan Kucskar. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009). 

[2] GAO, Recovery Act: States' and Localities' Uses of Funds and 
Actions Needed to Address Implementation Challenges and Bolster 
Accountability, [hyperlink, http://www.gao.gov/products/GAO-10-604] 
(Washington, D.C.: May 26, 2010). For related state appendixes, see 
[hyperlink, http://www.gao.gov/products/GAO-10-605SP]. 

[3] The 14 states we reviewed are Arizona, California, Colorado, 
Florida, Georgia, Iowa, Massachusetts, Mississippi, New Jersey, New 
York, North Carolina, Ohio, Pennsylvania, and Texas. 

[4] We interviewed officials in EPA Region 3 (Philadelphia), Region 6 
(Dallas), Region 8 (Denver), and Region 9 (San Francisco). 

[5] EPA allocates clean water funds to the states based on a statutory 
formula. The $4 billion in Recovery Act funds includes about $39 
million in Clean Water Act (CWA) Section 604(b) Water Quality 
Management Planning Grants. Section 604(b) of the CWA requires the 
reservation each fiscal year of a small portion of each state's Clean 
Water SRF allotment - usually 1 percent - to carry out planning under 
Sections 205(j) and 303(e) of the CWA. States generally use 604(b) 
grants to fund regional comprehensive water quality management 
planning activities to improve local water quality. In this testimony, 
any reference to Recovery Act funds excludes these planning grants. 

[6] In this report we use the word "project" to mean an assistance 
agreement, i.e., a loan or grant agreement made by the state SRF 
program to a subrecipient for the purpose of a Recovery Act project. 

[7] The Recovery Act requires states to have all funds awarded to 
projects "under contract or construction" by the 1-year deadline. EPA 
interprets this as requiring states to have all projects under 
contract in an amount equal to the full value of the Recovery Act 
assistance agreement by the deadline, regardless of whether 
construction has begun, according to a September 2009 memorandum. 
Thus, in this report, we use "under contract" when referring to this 
requirement. Further, according to EPA's March 2, 2009, memorandum, 
the agency will deobligate any Recovery Act SRF funds that a state 
does not have awarded to projects under contract by the 1-year 
deadline and reallocate them to other states. 

[8] The Buy American provisions of the Recovery Act generally require 
that iron, steel, and manufactured goods acquired for use on a public 
building or public work be produced in the United States, subject to 
limited exceptions. The Davis-Bacon provisions of the Recovery Act 
require that contractors and subcontractors pay all laborers and 
mechanics working on Recovery Act projects at least the prevailing 
wage rates in the local area where they are employed, as determined by 
the Secretary of Labor. 

[9] States differ in how they define disadvantaged communities. In 
general, disadvantaged community status takes into account factors 
such as median household income and community size. At least one state 
included in this report determines disadvantaged community status at 
the county level. Some states have introduced efforts to provide base 
SRF funds to disadvantaged communities, while others have not. 

[10] Because three states do not maintain information on which 
projects serve disadvantaged communities and two additional states 
maintain only limited information on which projects serve 
disadvantaged communities, we cannot provide complete information on 
the number of projects serving these communities. 

[11] Combined sewer systems are designed to collect rainwater runoff, 
domestic sewage, and industrial wastewater in the same pipe. 

[End of section] 

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