How water utilities can leverage State Revolving Funds

The Infrastructure Investment and Jobs Act (IIJA) has allocated nearly $44 billion over the next five years to be distributed to states through the existing State Revolving Funds (SRF). The Drinking Water State Revolving Fund (DWSRF) and the Clean Water State Revolving Fund (CWSRF) both have a proven track record for facilitating the use of federal money for water infrastructure projects in local communities and are funded on an annual basis for over a decade. The passing of the IIJA means that state revolving funds will have an estimated six times the funding compared to the annual baseline for these programs beginning in 2022. 

CWSRF and DWSRF were created by the amendments to the Clean Water Act in 1987 and Safe Drinking Water Act in 1996, respectively. Annual appropriations (SRF) are made to each state, and while the EPA provides oversight of the programs, each state is given the flexibility to administer the programs to best accommodate their local water systems. Financing options provided by the funds are typically grants or low-interest loans. Many states, however, have offered other creative options such as guarantee loans and other subsidizations. 

Who is eligible for State Revolving Funds? 

Both public and privately-owned community water systems, as well as nonprofit non-community systems, are eligible to apply for the funds on a per project basis. The water system must be able to show that they are in compliance with all applicable drinking water laws and regulations, including TMF (technical, managerial, and financially) capacity within their operations, as required by the Safe Drinking Water Act—the exception to this would be if the water system applied for the funding to facilitate a project to help the system get back into compliance.  

Since the funds are administered by each state, eligibility may vary. Water systems applying for the loan portions of the program must be able to show they have not reached their debt capacity and have means to repay the loans per the terms determined in the application process. 

A wide range of projects are accepted by the program, with the main criteria being the facilitation of compliance with the national primary drinking water regulations or otherwise significantly furthering public health protection. Some projects such as construction or rehabilitation of dams, projects needed primarily to serve future populations, or projects needed primarily for fire protection are excluded from funding. Additionally, water system operation and maintenance expenses and routine compliance monitoring expenses are generally ineligible for the program. 

How to apply for State Revolving Funds 

The process begins with the water system submitting their projects to their state SRF administration, which, if approved, are added to a Project Priority List (PPL). The PPL is included in the state’s Intended Use Plan (IUP), which is developed annually by the state and made available for public review prior to being submitted to the state’s regional EPA office. 

Once the PPL is approved, the state uses it as a guide to distribute financing to various projects (Note: CWSRF can fund any project on the list; DWSRF must fund in priority order unless there is a bypass process is in place). A more detailed application is required at this step in the process to determine how the water system will meet all the program requirements (i.e., Davis-Bacon Wage Laws, Disadvantaged Business Enterprise participation, American Iron and Steel (AIS) requirement etc.).

Steps to apply: 

1. Step 1: Initial applications to be reviewed by the state to determine eligibility and added to the PPL
2. Step 2: Projects on the PPL above the fundable line are invited to submit a full application with details on the project and a financial review of the entity to determine ability to repay loans
3. Step 3: Terms of the loan are determined (including portion of grant money available)
4. Step 4: Loan is closed and entity can begin invoicing the state for the completed eligible work

IIJA contributions 

The dollars allocated by the IIJA will be provided to the states in the form of by grants (49%) and loans (51%), with all money specifically allocated to PFAS and other emerging contaminants funded with 100% grants. Although the IIJA allocations will run through the existing SRF programs, there are some important differences to note. States are typically required to match 20% of all federal funding for the SRF program. For the first two years of the IIJA funding distribution, the state match drops to 10% (reverting back to the 20% match requirement during Year 3 of the five-year funding plan). State match, however, is waived for all lead removal, PFAS, and other emerging contaminants work. 

Challenges exist—but we can help 

The passing of the IIJA was an investment in the nation’s drinking water systems. Now the hard work begins. The first task will be for the EPA to work together with the states’ SRF administration programs to determine how the funds will be rolled out and how the existing process will adapt with the sudden influx of financial availability. Although a small portion of the funds are able to be allocated to the administration costs of the programs, the logistics and staffing will still need to be refined.   

Once the programs are in place, the onus will be on the water systems to determine eligibility, prioritize projects, and ramp up resources to complete the projects during the allocated timeframe. Many of the loan options will also require interim financing based on how the program cycles for loan distribution are set up. Some states partner with local agencies to provide borrowers with low or 0% short-term financing options (for example, the Massachusetts Clean Water Trust). 

Application deadlines and other program criteria will need to be revised to utilize this year’s allocations. Once the project is underway, documentation must be kept and submitted periodically to the state administration. Careful attentions to program requirements and a strong relationship with local administrators are two key pieces to successfully utilizing the financial options available.  

Contact our water team, who is experienced in project prioritization techniques, knowledgeable about how to secure SRF funding, brings project planning methodologies to facilitate quick project launch, and enables strong execution of high visibility projects and programs.