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Drinking Water
State Revolving Fund (DWSRF) Program Policy Announcement: Eligibility
of Reimbursement of Incurred Costs for Approved Projects
[Federal Register: January 12, 1999 (Volume 64, Number 7)]
[Notices]
[Page 1802-1804]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ja99-54]
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ENVIRONMENTAL PROTECTION AGENCY
[FRL-6217-9]
Drinking Water State Revolving Fund (DWSRF) Program Policy
Announcement: Eligibility of Reimbursement of Incurred Costs for
Approved Projects
AGENCY: Environmental Protection Agency.
ACTION: Notice.
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SUMMARY: The U.S. Environmental Protection Agency (EPA) is issuing a
policy decision for the Drinking Water State Revolving Fund (DWSRF)
program that will allow States to reimburse construction costs incurred
by a public water system prior to execution of a loan agreement under
specific conditions. The Agency published the proposed policy in the
Federal Register on June 12, 1998 to seek public comment. Comments
received during the comment period and in a stakeholder meeting held on
July 13, 1998 were considered in developing the final policy.
Background: The Safe Drinking Water Act (SDWA), as amended in 1996,
established a DWSRF program to provide grants to States which, in turn,
use the funds to provide loans to public water systems for
infrastructure improvements. States are responsible for developing a
priority system that identifies how projects will be ranked for funding
and a comprehensive list of projects, in priority order, that are
eligible for funding. States must also identify which projects on this
comprehensive list will get funding within the current year, either by
developing a separate fundable list or noting those projects on the
comprehensive list. Both privately-owned and publicly-owned systems are
eligible for funding. The Act also contains a provision which allows
State DWSRF programs to provide loans to publicly-owned systems to
refinance eligible projects. Specifically, section 1452(f)(2) allows
States ``to buy or refinance the debt obligation of a municipality,
intermunicipal or interstate agency within the State * * * in any case
in which a debt obligation is incurred after July 1, 1993.'' The
eligibility for refinancing does not extend to privately- owned
systems.
A number of States expressed concern that a strict interpretation
of this refinance provision could delay construction of projects
associated with privately-owned systems that are on the priority list
for funding and are needed to solve public health problems. In some
States, particularly those that leverage capitalization grants to
generate more funds for projects, loan agreements with applicants are
finalized at specific time periods during the year to coincide with
financing. These States often make ``bridge'' loans to fund activities
prior to execution of the formal loan agreement which occurs after the
State has completed financing. Other States face challenges related to
the seasonal nature of construction schedules. States wanted to have
the flexibility to notify eligible privately and publicly-owned systems
that they will receive funding from the State and then reimburse the
systems for costs incurred in the time period between the notification
and execution of the loan agreement. This flexibility would encourage
systems to move ahead with construction in order to, for example, take
advantage of seasonal construction cycles.
EPA does not believe that the intention of section 1452(f)(2) was
to preclude funding of eligible costs in these situations. Projects
which have been identified for funding on the priority list and that
receive notification from the State should be able to move
[[Page 1803]]
ahead with construction and have these short-term construction costs
included in the DWSRF loan under certain conditions.
In its June 12, 1998 Federal Register document, the EPA proposed
that any project that has been given approval, authorization to
proceed, or any similar action by the State prior to the actual project
construction could be eligible for reimbursement of construction
expenses incurred after such State action, provided that the project
met all of the requirements of the DWSRF program. Such a project would
have to be on the State's fundable list, developed using a priority
system approved by EPA. A project on the comprehensive list which could
be funded when a project on the fundable list was bypassed using the
State's bypass procedures could also be eligible for reimbursement of
costs incurred after the system had been informed that it would receive
funding. These requirements would apply regardless of whether the
system financed costs using a short-term debt instrument or internal
capital.
The proposal further noted that projects receiving reimbursement of
incurred costs would be subject to all other Federal requirements
required of a recipient of Federal funds, including an environmental
review which must consider the impacts of the project based on the pre-
construction site conditions. A failure to comply with the State's
environmental review process could not be justified on the grounds that
costs had already been incurred, environmental impacts had already been
caused, or contractual obligations had been made prior to the binding
commitment.
Finally, the proposal solicited comment on whether a privately-
owned system that had been constructed without meeting the above listed
criteria could get refinanced from the DWSRF if it used internal
capital instead of a debt obligation. The proposal suggested that
internal capital be treated the same as a debt obligation in these
situations.
Comments
Comments were received from 20 parties, all but one of whom
supported the policy of reimbursing systems that initiate construction
after being notified of the State's intent to fund the project. Most of
the concern about the policy was directed at two aspects of the
proposal. The first concerned viewing internal capital used by a system
to complete construction, without having first met the criteria for
reimbursement, as equivalent to a debt obligation. Seven commentors
indicated that internal capital should not be viewed as equivalent to
debt--that if a system uses its own funds, it should be allowed to
apply for a loan to cover those costs. The second was whether to allow
reimbursement of planning and design costs that occurred prior to the
system's receiving notification to proceed. Eleven commentors indicated
that planning and design should be treated in the same manner as it is
for other loans. They noted that if EPA were to determine that planning
and design costs were only eligible after a system had received
notification from the State that it would receive funds, it would make
it more difficult for privately-owned systems to get on the priority
list in States which require planning and design to be completed before
the project can even be placed on the fundable list. This would also be
inconsistent with the Clean Water SRF policy that includes costs
incurred for planning and design in the project loan, regardless of
when planning and design occurred. The commentors recommended that
reimbursement include construction costs and prebuilding costs, which
include planning and design.
A few commentors recommended that EPA extend the time frame over
which costs could be reimbursed to include the time period during which
the SDWA Amendments were in development, to July 1, 1993 (target date
for refinancing publicly-owned systems), or to the date that a State
passed legislation authorizing its program. A few State representatives
asked for flexibility in defining what constitutes authorization to
proceed and noted that in some States, the requirement that a project
be on a fundable list before costs can be reimbursed would be too late
in that State's process.
Response to Comments
EPA recognizes that excluding eligibility of planning and design
costs could be problematic for systems and for States. Disallowing
these costs for reimbursed projects would imply that prebuilding costs
incurred by privately-owned systems when preparing to apply for a loan
could not be recouped. Additionally, it is more consistent with the
Clean Water SRF and the DWSRF for publicly-owned systems to consider
these costs eligible.
Concerning the issue of whether internal capital should be viewed
the same as a debt obligation, EPA believes that there is no
substantive difference between internal capital and a debt obligation
when a system requests a DWSRF loan to fund a project that it has
completed. EPA further believes that congressional intent and the
statute restricts the use of DWSRF funds for refinancing to projects
that were completed by publicly-owned systems and that the only
exception to this is the short-term reimbursement of costs to allow
systems that are in line to receive funds to begin construction as soon
as possible. EPA, therefore, does not support extending the time frame
from which privately-owned systems could be eligible for reimbursement.
In developing the proposal, the Agency recognized that States
differ somewhat in their procedures for notifying applicants that they
will receive a loan and has proposed language that allows considerable
flexibility.
Final Policy
The refinancing of project costs associated with a privately-owned
system is an ineligible activity under the DWSRF program, regardless of
the source of financing used to complete a project.
A project (for a privately-or publicly-owned system) that has been
given approval, authorization to proceed, or any similar action by the
State prior to initiation of construction will be eligible for
reimbursement for construction costs incurred after such State action,
provided that the project meets all of the requirements of the DWSRF
program and the following criteria. Such a project must be on the
State's fundable list, developed using a priority system approved by
EPA. A project on the comprehensive list which is funded when a project
on the fundable list is bypassed using the State's bypass procedures
may also be eligible for reimbursement of costs incurred after the
system has been informed that it will receive funding. Prebuilding
costs, such as planning and design, are also eligible when a system
receives a loan for construction. Systems may receive reimbursement
regardless of the method used to finance the short-term construction
costs. Internal capital and debt obligations will be viewed as
equivalent for the purposes of this policy.
Projects receiving reimbursement of incurred costs are subject to
all other Federal requirements required of a recipient of Federal
funds, including an environmental review which must consider the
impacts of the project based on the pre-construction site conditions.
Failure to comply with the State's environmental review process cannot
be justified on the grounds that costs have already been incurred,
environmental impacts have already been caused, or contractual
obligations
[[Page 1804]]
have been made prior to the binding commitment.
FOR FURTHER INFORMATION CONTACT: The Safe Drinking Water Act Hotline,
telephone (800) 426-4791. Information about the DWSRF program,
including program guidelines and State contact information, is
available from the EPA Office of Ground Water and Drinking Water Web
Site at the URL address ``http://www.epa.gov/safewater.''
Dated: December 28, 1998.
Cynthia C. Dougherty,
Director, Office of Ground Water and Drinking Water.
[FR Doc. 99-665 Filed 1-11-99; 8:45 am]
BILLING CODE 6560-50-U
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