[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Notices]
[Pages 1802-1804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-665]


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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