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: