[Federal Register Volume 65, Number 152 (Monday, August 7, 2000)]
[Rules and Regulations]
[Pages 48286-48312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19783]



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Part II





Environmental Protection Agency





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40 CFR Parts 9 and 35



Drinking Water State Revolving Funds; Interim Final Rule

  Federal Register / Vol. 65, No. 152 / Monday, August 7, 2000 / Rules 
and Regulations  

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Parts 9 and 35

[FRL-6846-5]
RIN 2040-AD20


Drinking Water State Revolving Funds

AGENCY: Environmental Protection Agency.

ACTION: Interim final rule.

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SUMMARY: The national Drinking Water State Revolving Fund (DWSRF) 
program, which was established by the Safe Drinking Water Act (SDWA) 
Amendments of 1996, authorizes the U.S. Environmental Protection Agency 
(EPA) to award capitalization grants to States, which in turn may 
provide low-cost loans and other types of assistance to eligible public 
water systems to finance the costs of infrastructure projects needed to 
achieve or maintain compliance with SDWA requirements. States are also 
authorized to set aside a portion of their capitalization grants to 
fund a range of activities including source water protection, capacity 
development, and operator certification.
    This interim final rule codifies the DWSRF Program Final Guidelines 
published in February 1997 and explains: what States must do to receive 
a capitalization grant; what States may do with capitalization grant 
funds intended for infrastructure projects; what States may do with 
funds intended for set-aside activities; and the roles of both the 
States and EPA in managing and administering the program. Each State 
has considerable flexibility to determine the design of its DWSRF 
program and to direct funding toward its most pressing compliance and 
public health needs.

DATES: This interim final rule is effective August 7, 2000. Public 
comments must be received by EPA, in writing, by October 6, 2000. 
Comments will be considered and, if necessary, EPA will issue a revised 
final rule changing today's interim final rule to respond to these 
comments.

ADDRESSES: Send written comments on this interim final rule to the 
Comment Clerk (Docket W-00-11), Water Docket (MC-4101), U.S. 
Environmental Protection Agency, Ariel Rios Building, 1200 Pennsylvania 
Avenue, NW, Washington, DC 20460. Comments may be hand-delivered to the 
Water Docket, U.S. Environmental Protection Agency, 401 M Street, SW, 
East Tower Basement, Room EB57, Washington, DC 20460. Comments may also 
be submitted electronically to [email protected].
    Please submit an original and three copies of your comments and 
enclosures (including references). The Agency requests that commentors 
follow the following format: Type or print in ink, and cite, where 
possible, the paragraphs in this interim final rule to which each 
comment refers. Electronic comments must be submitted as a WordPerfect 
5.1, 6.1, or 8.0 file or as an ASCII file avoiding the use of special 
characters and forms of encryption. Electronic comments must be 
identified by Docket W-00-11. Comments and data will also be accepted 
on disks in the formats above. Electronic comments may be filed online 
at many Federal Depository Libraries. Commentors who want EPA to 
acknowledge receipt of their comments should include a self-addressed, 
stamped envelope. No facsimiles (faxes) will be accepted.
    The record for this interim final rule has been established under 
Docket W-00-11, which includes supporting documentation, and is 
available for review at the Water Docket, U.S. Environmental Protection 
Agency, 401 M Street, SW, East Tower Basement, Room EB57, Washington, 
DC 20460. For access to the Docket materials, please call (202) 260-
3027 between 9 a.m. and 3:30 p.m. (Eastern Time), Monday through 
Friday, for an appointment and reference Docket W-00-11.

FOR FURTHER INFORMATION CONTACT: For technical inquiries, contact 
Kimberley Roy, Implementation and Assistance Division, Office of Ground 
Water and Drinking Water (MC-4606), U.S. Environmental Protection 
Agency, Ariel Rios Building, 1200 Pennsylvania Avenue, NW, Washington, 
DC 20460. The telephone number is (202) 260-2794 and the e-mail address 
is [email protected]. For general information, contact the Safe 
Drinking Water Hotline, toll free at (800) 426-4791. The Safe Drinking 
Water Hotline is open Monday through Friday, excluding Federal 
holidays, from 9:00 a.m. to 5:30 p.m. (Eastern Time). DWSRF program 
information, including a copy of this interim final rule, are available 
on EPA's Office of Ground Water and Drinking Water website at http://www.epa.gov/safewater/dwsrf.html.

SUPPLEMENTARY INFORMATION: Regulated Entities: Entities listed in 
Sec. 35.3500 are regulated by this rule. Regulated categories and 
entities include:

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              Category                        Regulated entities
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Government..........................  Governments/Agencies of the 50
                                       States and the Commonwealth of
                                       Puerto Rico.
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    This table is not intended to be exhaustive, but rather provides a 
guide for readers regarding entities likely to be regulated by this 
action. This table lists the types of entities that EPA is now aware 
could potentially be regulated by this action. Other types of entities 
not listed in this table could also be regulated by this action. To 
determine whether your organization is regulated by this action, you 
should carefully examine the applicability criteria in Sec. 35.3500 of 
this rule. If you have questions regarding the applicability of this 
action to a particular entity, consult the person listed in the 
preceding FOR FURTHER INFORMATION CONTACT section.

Preamble Outline

I. Statutory Authority
II. Purpose
III. DWSRF Program Background
IV. Allocation of National Appropriation for DWSRF Program
    A. National Set-asides
    B. Allotment to States
    C. Allotment to Other Jurisdictions and the District of Columbia
V. DWSRF Program Implementation
VI. Rule Development Process
VII. Major Matters in this Rule
    A. Withholdings of Funds (40 CFR 35.3515 (b)(1)(i) through 
(b)(1)(iii))
    B. Use of Examples of Projects Eligible for Assistance from the 
Fund (40 CFR 35.3520(b))
    C. Eligibility of Creation of New Public Water Systems for 
Assistance from the Fund (40 CFR 35.3520(b)(2)(vi))
    D. Ineligibility of Dams, Reservoirs, Water Rights, and Future 
Population Growth for Assistance from the Fund (40 CFR 35.3520 
(e)(1) through (e)(3) and (e)(5))
    E. Inclusion of Eligible Project Reimbursement Costs Within 
Loans (40 CFR 35.3525(a)(2))
    F. Assistance from the Fund for Disadvantaged Communities (40 
CFR 35.3525(b))
    G. Program Administration: Fees Paid Directly by an Assistance 
Recipient (40 CFR 35.3530(b)(2))
    H. Program Administration: Fees Included as Principal in a Loan 
(40 CFR 35.3530(b)(3))
    I. Transfer and Cross-collateralization of Funds Between the 
DWSRF and CWSRF Programs (40 CFR 35.3530 (c) through (d))
    J. Authorized Set-aside Activities (40 CFR 35.3535(a)(2))
    K. State Program Management Set-aside Match Requirement (40 CFR 
35.3535(d)(2))
    L. Reserving Set-aside Funds (40 CFR 35.3540(d))
    M. State Match Requirement (40 CFR 35.3550(g))
    N. Preparation of an IUP (40 CFR 35.3555(a))
    O. Meaningful Public Review of the IUP (40 CFR 35.3555 b))
    P. Priority System Requirements in the IUP (40 CFR 
35.3555(c)(1))

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    Q. Cash Draw Rules (40 CFR 35.3560 and 35.3565)
    R. Audit Requirements (40 CFR 35.3570(b))
    S. Application of Federal Cross-Cutting Authorities (Cross-
cutters) (40 CFR 35.3575)
    T. Minority and Women's Business Enterprise (MBE/WBE) 
Procurement Requirements (40 CFR 35.3575(d))
    U. Environmental Review Requirements (40 CFR 35.3580)
VIII. Administrative Requirements
    A. Executive Order 12866: Regulatory Planning and Reviews
    B. Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 
U.S.C. 601 et seq.
    C. Paperwork Reduction Act
    D. Unfunded Mandates Reform Act
    E. National Technology Transfer and Advancement Act
    F. Congressional Review Act
    G. Executive Order 13132: Federalism
    H. Executive Order 13045: Children's Health
    I. Executive Order 13084: Consultation and Coordination with 
Indian Tribal Governments
    J. Executive Order 12898: Environmental Justice

I. Statutory Authority

    This interim final rule implements section 1452 of the SDWA (42 
U.S.C. 300j-12) which establishes a national DWSRF program to assist 
public water systems in financing the cost of drinking water 
infrastructure projects needed to achieve or maintain compliance with 
SDWA requirements and to further the public health objectives of the 
Act. Section 1452(g)(3) of the SDWA states that ``the Administrator 
shall publish guidance and promulgate regulations as may be necessary 
to carry out the provisions of this section.''

II. Purpose

    This interim final rule codifies and implements requirements for 
the national DWSRF program under section 1452 of the SDWA. This interim 
final rule supplements EPA's general grant regulations at 40 CFR part 
31 which contain administrative requirements that apply to governmental 
recipients of EPA grants and subgrants. With the exception of 
requirements for the participation of minority and women's business 
enterprises (MBE/WBEs), EPA's general grant regulations at 40 CFR part 
31 do not apply to recipients of loans and other types of assistance 
from a State DWSRF program Fund. The requirements for the participation 
of MBE/WBEs apply to assistance recipients under EPA's fiscal year 1993 
Appropriations Act (Pub. L. 102-389). In developing this interim final 
rule, EPA has attempted to identify all the major program requirements. 
To that end, this rule includes items required by the SDWA and those 
additional program requirements that EPA considers necessary for 
effective program management.
    This interim final rule applies to States (i.e., each of the 50 
States and the Commonwealth of Puerto Rico) which receive 
capitalization grants and are authorized to establish a Fund under 
section 1452 of the SDWA. While eligible public water systems and other 
assistance recipients are not regulated by this interim final rule, 
they may be indirectly affected because it includes requirements that 
they must meet in order to receive funding from the State for purposes 
authorized under section 1452 of the SDWA. This interim final rule does 
not apply to Indian Tribes and Alaska Native Villages, the District of 
Columbia, and other jurisdictions (i.e., Virgin Islands, the 
Commonwealth of the Northern Mariana Islands, American Samoa, and Guam) 
that receive grants under section 1452 because they are not authorized 
to establish a Fund. Grants under section 1452 to Indian Tribes and 
Alaska Native Villages, the District of Columbia, and other 
jurisdictions are administered by the EPA Regional Offices under 
separate guidance.

III. DWSRF Program Background

    The SDWA authorizes EPA to award capitalization grants to States 
that have established DWSRF programs complying with the requirements of 
section 1452. States use a portion of these grants to capitalize a 
revolving Fund from which low-cost loans and other types of assistance 
are provided to publicly-owned and privately-owned community water 
systems and non-profit noncommunity water systems to finance the costs 
of infrastructure projects. States must also contribute to the 
capitalization of their DWSRF programs by depositing State monies 
equaling at least 20 percent of each grant into the Fund. Loan 
repayments made by assistance recipients to the States return to the 
Fund and provide a continuing source of financing for projects. States 
are responsible for developing a priority system that identifies how 
projects will be ranked for funding and a list of projects, in priority 
order, that are eligible for funding.
    While it is essential to address infrastructure needs of public 
water systems, Congress recognized the value of establishing programs 
which will prevent drinking water problems in the future. Therefore, 
States may set aside a portion of their capitalization grants to fund 
activities that encourage enhanced water system management and help to 
prevent contamination problems through source water protection 
measures. The success of these set-aside activities will act to 
safeguard the DWSRF program funds that are provided for improving 
system compliance and public health protection. The SDWA also places 
particular emphasis on assisting small systems serving fewer than 
10,000 people and on systems serving less affluent populations by 
providing greater funding flexibility for these systems.
    A State may combine the financial administration of the Fund with 
the financial administration of any other revolving fund established by 
the State, including the Clean Water State Revolving Fund (CWSRF) 
program established under Title VI of the Clean Water Act (CWA). 
However, section 1452(g)(1)(B) of the SDWA requires that ``the 
authority to establish assistance priorities and carry out oversight 
and related activities (other than financial administration) with 
respect to assistance remains with . . .'' the State primacy agency, 
after consultation with other appropriate State agencies.
    In view of this language and the overall role of the State primacy 
agency in SDWA programs, EPA has determined that Congress intended for 
the primacy agency to be the State agency which determines assistance 
priorities for the DWSRF program, including priorities assigned to 
projects and allocation of funds between the Fund and set-asides, 
regardless of whether or not a State combines financial administration 
of the Fund. Further, although the primacy agency has the authority to 
carry out oversight and related activities, memoranda of understanding 
or interagency agreements may be entered into with other State agencies 
to manage aspects of the DWSRF program which could include reviewing 
assistance applications and project bid documents, monitoring projects, 
and ensuring compliance with environmental review and other program 
requirements.
    Beginning one year after a State establishes its Fund (i.e., one 
year after the State has received its first DWSRF program 
capitalization grant for projects), a State may transfer an amount 
equal to 33 percent of a fiscal year's DWSRF program capitalization 
grant to the CWSRF program or an equivalent amount from the CWSRF 
program to the DWSRF program. This provision linking the national DWSRF 
and the CWSRF programs signals Congressional intent for EPA and the 
States to implement and manage the two programs in a similar manner. To 
the

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maximum extent practicable, EPA intends to administer the financial 
aspects of the national DWSRF program in a manner that is consistent 
with the policies and procedures of the national CWSRF program. Each 
State has considerable flexibility to determine the design of its 
program and to direct funding toward its most pressing compliance and 
public health protection needs.

IV. Allocation of National Appropriation for DWSRF Program

    Section 1452(m) of the SDWA authorizes Congress to appropriate a 
total of $9.6 billion for the national DWSRF program for fiscal years 
1994 through 2003.

A. National Set-Asides

    National set-asides are reserved from funds annually appropriated 
by Congress under section 1452 of the SDWA. These national set-asides 
are:
    (1) Indian Tribes/Alaska Native Villages. Section 1452(i) of the 
SDWA indicates that the Administrator may reserve 1.5 percent from 
annually appropriated funds under section 1452 to make grants to Indian 
Tribes and Alaska Native Villages. Projects for Indian Tribes and 
Alaska Native Villages that have not otherwise received either grant or 
DWSRF program assistance under section 1452 for a specific project are 
eligible for grant financing under this provision. EPA published the 
Tribal Set-aside Program Final Guidelines (EPA 816-R-98-020) in October 
1998 establishing requirements for the selection of projects, project 
management, and program oversight for these grants. The Tribal Set-
aside Program is administered by the EPA Regional Offices.
    (2) Health effects studies. Section 1452(n) of the SDWA requires 
the Administrator to reserve $10 million from annually appropriated 
funds under section 1452 to conduct health effects studies on drinking 
water contaminants. However, the Department of Veteran Affairs and 
Housing and Urban Development, and Independent Agencies Appropriations 
Acts, 1998, 1999, and 2000 (Public Law 105-65, Public Law 105-276, and 
Public Law 106-74, respectively) have precluded the Administrator from 
reserving these funds from annually appropriated funds under section 
1452 and have instead provided funding for health effects studies from 
other sources.
    (3) Unregulated contaminant monitoring. Starting in fiscal year 
1998, section 1452(o) of the SDWA requires the Administrator to reserve 
$2 million from annually appropriated funds under section 1452 to pay 
for the costs of monitoring unregulated contaminants under section 
1445(a)(2)(C).
    (4) Small system technical assistance. Section 1452(q) of the SDWA 
indicates that the Administrator may reserve up to 2 percent of the 
funds appropriated under section 1452 in fiscal years 1997 through 2003 
to carry out the technical assistance for small systems provisions of 
section 1442(e) to the extent that the total amount of funding 
appropriated under section 1442(e) is not sufficient. The total 
combined amount of funds made available under this set-aside and the 
funds appropriated under section 1442(e) cannot exceed $15 million per 
year.
    (5) Operator training reimbursement. Section 1419(d)(1) of the SDWA 
requires the Administrator to provide grants to States to reimburse the 
costs of training and certifying operators of public water systems 
serving 3,300 persons or fewer to meet the requirements of the Final 
Guidelines for the Certification and Recertification of the Operators 
of Community and Nontransient Noncommunity Public Water Systems 
published in the Federal Register (64 FR 5916) on February 5, 1999. 
Congress has authorized $30 million annually for fiscal years 1997 
through 2003 for grants for reimbursement under section 1419(d)(3). If 
the appropriation for any fiscal year is not sufficient to meet 
training and certification costs, the Administrator will, prior to any 
other allocation or reservation, reserve the necessary funds from those 
appropriated under section 1452.

B. Allotment to States

    The funds available for allotment to the States for capitalization 
grants are those funds appropriated by Congress under section 1452 of 
the SDWA less the national set-asides. For fiscal year 1997 
appropriations only, section 1452(a)(1)(D)(i) required EPA to allot 
funds according to the formula used for distributing public water 
system supervision (PWSS) grants in fiscal year 1995 under section 
1443. The minimum proportional share that each State received was one 
percent of the funds available for allotment to all of the States. This 
interim final rule does not include this requirement for determining 
the State allotment formula for fiscal year 1997 appropriations.
    Beginning with fiscal year 1998 appropriations, section 
1452(a)(1)(D)(ii) of the SDWA requires EPA to allot funds to each State 
based on the State's proportional share of total eligible needs 
reported for the most recent Drinking Water Infrastructure Needs Survey 
conducted under section 1452(h) of the SDWA. The minimum proportional 
share that each State can receive is one percent of funds available for 
allotment to all of the States.
    The first Drinking Water Infrastructure Needs Survey: First Report 
to Congress (EPA 812-R-97-001) was presented to Congress on January 29, 
1997. Prior to finalizing this January 1997 report, EPA solicited 
public comment on six options for using the results to determine the 
allotment formula for fiscal year 1998, 1999, 2000, and 2001 
appropriations and finalized the allotment formula in the Federal 
Register (62 FR 12900) on March 18, 1997.
    Subsequent Drinking Water Infrastructure Needs Surveys are due to 
Congress every four years after the January 1997 report. The State 
allotment formula for fiscal year 2002 appropriations and subsequent 
appropriations will be adjusted to reflect the needs identified in the 
most recently published report.

C. Allotment to Other Jurisdictions and the District of Columbia

    Section 1452(j) of the SDWA requires the Administrator to reserve 
up to 0.33 percent of the funds available for allotment to the States 
to provide grants to the Virgin Islands, the Commonwealth of the 
Northern Mariana Islands, American Samoa, and Guam. Section 
1452(a)(1)(D) of the SDWA requires the Administrator to reserve one 
percent of the funds available for allotment to the States to provide 
grants to the District of Columbia. These grants are administered by 
the EPA Regional Offices.

V. DWSRF Program Implementation

    The DWSRF Program Interim Guidance was distributed on October 4, 
1996, to allow States to begin to develop their DWSRF programs and to 
allow capitalization grants to be awarded as soon as possible. The 
notice of availability of the Interim Guidance was published in the 
Federal Register (61 FR 55635) on October 28, 1996, and announced a 
public comment period which ended on November 28, 1996. EPA 
subsequently held a series of public meetings with stakeholders to 
provide information about the program and to review the Interim 
Guidance. Comments received during the period of public comment and 
from attendees of the public meetings were critical in developing the 
DWSRF Program Final Guidelines.
    The DWSRF Program Final Guidelines (EPA-816-R-97-005) were

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signed by the Assistant Administrator for Water on February 28, 1997. 
The Final Guidelines were made widely available to stakeholders, 
including the appropriate State agencies that are recipients of the 
DWSRF program capitalization grants and were published in the Federal 
Register (63 FR 59844) on November 5, 1998.
    Program requirements contained in the DWSRF Program Final 
Guidelines are superceded by this interim final rule. However, the 
Final Guidelines, the DWSRF program management manual, and other 
memoranda such as periodic question and answer documents will continue 
to provide guidance to States on DWSRF program implementation.

VI. Rule Development Process

    This interim final rule is the result of a thorough stakeholder 
consultation process. Because States have the responsibility for 
managing and administering the DWSRF program, members of a State/EPA 
SRF Work Group (formed to address policy implementation issues for the 
national DWSRF and CWSRF programs) were given the opportunity to review 
and comment on previous drafts of this rule. The State/EPA SRF Work 
Group is comprised of State DWSRF managers, State CWSRF managers, and 
managers of State financial agencies as well as EPA Regional and 
Headquarters staff. In May 1998, comments on a draft outline of the 
interim final rule were solicited and discussed at a State/EPA SRF Work 
Group meeting in Washington, District of Columbia. All comments on the 
draft outline were considered in developing the first draft of this 
rule.
    In September 1998, the first draft of this rule was sent to the 
State/EPA SRF Work Group for a 30 day comment period. Work Group 
members were encouraged to share the draft rule with their colleagues 
from other States. EPA received comments from 27 parties, 18 of whom 
were Work Group members. A number of comments that EPA considered 
significant (because they addressed policy issues or because they were 
submitted by more than one commentor) were discussed at a Work Group 
meeting in Seattle, Washington in November 1998. After the meeting, all 
comments were considered in developing the second draft of this rule.
    The second draft of this rule was posted on the Internet on April 
12, 1999, for a 45 day public comment period to give all interested 
parties an opportunity to comment. National stakeholder organizations, 
the State/EPA SRF Work Group, and State DWSRF managers were notified by 
EPA when the rule was posted. EPA received comments from 32 parties 
representing State government agencies, national trade organizations, 
and national State government organizations. All comments were 
considered in developing this interim final rule.

VII. Major Matters in This Rule

    This interim final rule includes several modifications or additions 
to the DWSRF Program Final Guidelines based on policies that have 
evolved as the DWSRF program has been implemented. These modifications 
or additions to the Final Guidelines provide additional flexibility to 
States in implementing their programs. The policies released after the 
DWSRF Program Final Guidelines went through rounds of comment and 
revisions in memoranda, guidance documents, or were published in the 
Federal Register for public comment. The requirements in these policies 
are reflected in this interim final rule.

A. Withholdings of Funds (40 CFR 35.3515 (b)(1)(i) Through (b)(1)(iii))

    In order to avoid a withholding of DWSRF program funds, each State 
is required to: (1) Ensure that new community water systems and new 
nontransient, noncommunity water systems demonstrate adequate 
technical, managerial, and financial capacity; (2) develop and 
implement a strategy to assist existing systems in acquiring and 
maintaining capacity; and (3) adopt and implement a program for 
certifying operators of community and nontransient, noncommunity water 
systems.
    EPA published the Draft Guidance on Implementing the Capacity 
Development Provisions of the SDWA Amendments for public comment in 
February 1998 for a 60 day comment period and published Final Guidance 
(EPA-816-R-98-006) in July 1998. The Final Guidance established 
national policy regarding the implementation of capacity development 
related provisions of the SDWA including how EPA would assess State 
capacity development programs for purposes of making withholding 
decisions.
    This interim final rule reflects the requirements in sections 
1420(a) and 1452(a)(1)(G)(i) of the SDWA that EPA withhold 20 percent 
of a State's allotment unless the State has the legal authority or 
other means to ensure that all new community water systems and new 
nontransient, noncommunity water systems commencing operations after 
October 1, 1999, demonstrate technical, managerial, and financial 
capacity with respect to each drinking water regulation in effect, or 
likely to be in effect, on the date of commencement of operations.
    EPA made the determination in the Final Guidance on Implementing 
the Capacity Development Provisions that, for fiscal year 1999 
allotments only, States would receive 100 percent of their allotments 
if they had the necessary basis of authority (statutory authority or 
other means) and were in the process of a scheduled administrative 
rulemaking, or were otherwise developing implementing authorities with 
a realistic schedule and expectation to have fully functional programs 
as of October 1, 1999. States failing to meet this requirement at the 
time of their capitalization grant awards would have 20 percent of 
their allotments ``held back.'' This 20 percent holdback of fiscal year 
1999 allotments would become a permanent withholding for any State that 
could not demonstrate by September 30, 1999, that it would have a fully 
functional program in place on October 1, 1999.
    EPA also made the determination in the Final Guidance on 
Implementing the Capacity Development Provisions that, for fiscal year 
2000 allotments and beyond, withholdings would be based on an 
assessment of the status of the State program as of October 1 of the 
fiscal year for which the funds were allotted. This interim final rule 
only reflects the withholding provisions in the Final Guidance for 
fiscal year 2000 allotments and beyond.
    This interim final rule reflects the requirements in sections 
1420(c)(1) and 1452(a)(1)(G)(i) of the SDWA that EPA withhold funds 
from any State unless the State is developing and implementing a 
strategy to assist public water systems in acquiring and maintaining 
technical, financial, and managerial capacity. The amount of a State's 
allotment that will be withheld is 10 percent for fiscal year 2001, 15 
percent for fiscal year 2002, and 20 percent for each subsequent fiscal 
year. EPA made the determination in the Final Guidance on Implementing 
the Capacity Development Provisions that withholdings would be based on 
an assessment of the status of the State strategy as of October 1 of 
the fiscal year for which the funds were allotted. This interim final 
rule reflects the withholding provisions in the Final Guidance.
    EPA published the Public Review Draft Guidelines for the 
Certification and Recertification of the Operators of Community and 
Nontransient Noncommunity Public Water Systems in the Federal Register 
(63 FR 15064) for public comment on March 27, 1998, and the Final 
Guidelines in the Federal

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Register (64 FR 5916) on February 5, 1999. This interim final rule 
reflects the requirements in sections 1419(b) and 1452(a)(1)(G)(ii) of 
the SDWA that, beginning on February 5, 2001 (two years after the 
Operator Certification Final Guidelines were published), EPA will 
withhold 20 percent of a State's allotment unless the State has adopted 
and is implementing a program for certifying operators of community and 
nontransient, noncommunity water systems that meets the requirements of 
section 1419 of the SDWA.
    This interim final rule also states that the determination for 
withholdings will be based on an assessment of the status of the State 
program for each fiscal year. After seeking comment, EPA will finalize 
the specific process for reviewing and making withholding 
determinations for operator certification program submittals and 
publish it in the Federal Register. This process will be included as 
part of the Operator Certification Final Guidelines in Section III 
(Program Submittal Process), Subsection A (Submittal Schedule and 
Withholding Process), which is currently reserved in these Final 
Guidelines.

B. Use of Examples of Projects Eligible for Assistance From the Fund 
(40 CFR 35.3520(b))

    During development of this interim final rule, several commentors 
expressed concern that the use of examples of projects that are 
eligible for assistance from the Fund could be perceived as 
exclusionary. Specifically, commentors were concerned that if there is 
a project that falls under a particular category but does not closely 
match an example, then it could be construed that the project would be 
ineligible. The use of examples of eligible projects is not 
exclusionary. Examples of eligible projects are used simply to clarify 
the types of projects that fall under a particular project category in 
order to improve the readability of this interim final rule. For 
instance, although water meters are not included in this interim final 
rule as a funding example under the transmission and distribution 
project category, they are eligible if owned and maintained by a public 
water system. Questions about the eligibility of specific types of 
projects are generally handled by EPA on a case by case basis.

C. Eligibility of Creation of New Public Water Systems for Assistance 
From the Fund (40 CFR 35.3520(b)(2)(vi))

    Section 1452(a)(2) of the SDWA authorizes a State to provide 
assistance from the Fund to a public water system, which is defined in 
section 1401 of the SDWA as ``a system for the provision to the public 
of water for human consumption through pipes or other constructed 
conveyances, if such system has at least 15 service connections or 
regularly serves at least 25 individuals * * *'' Several States 
expressed concern that this provision could be interpreted to prevent 
them from providing assistance to an entity (e.g., homeowners' 
association, township) that has a public health problem and is not 
currently a public water system, but which would become a Federally 
regulated public water system upon construction of a piped system.
    In response to State concerns, EPA proposed a policy on the 
eligibility of providing assistance from the Fund to create a public 
water system. This policy was published in the Federal Register (63 FR 
32208) on June 12, 1998, for a 30 day comment period. EPA also held a 
stakeholder meeting to discuss the policy. After consideration of 
comments, a final policy was published in the Federal Register (63 FR 
59299) on November 3, 1998. The final policy allows for assistance to 
be provided for the creation of a Federally regulated community water 
system to address an existing public health problem caused by unsafe 
drinking water provided by individual wells or surface water sources. 
This policy also applies to situations where a new regional community 
water system is created by consolidating several existing systems that 
have technical, financial, or managerial difficulties.
    A proposed project may only receive assistance if the following 
conditions are met: (1) Upon completion of the project, the entity 
responsible for the loan must meet the definition of a Federal 
community water system; (2) the project must be on the State's priority 
list of projects eligible for funding and must address an actual public 
health problem with serious risks; (3) the project must be limited in 
scope to the specific geographic area affected by contamination; (4) 
the project can only be sized to accommodate a reasonable amount of 
growth expected over the life of the facility--growth cannot be a 
substantial portion of the project; (5) the project must meet the same 
technical, financial, and managerial capacity requirements that the 
SDWA requires of all DWSRF program assistance recipients; and (6) the 
project must be a cost-effective solution to the public health problem.
    Condition (1) is specifically included in Sec. 35.3520(a)(2). The 
statement in condition (2) that ``the project must be on the State's 
priority list of projects eligible for funding,'' the statement in 
condition (4) that ``the project can only be sized to accommodate a 
reasonable amount of growth expected over the life of the facility,'' 
and condition (5) are not specifically included in Sec. 35.3520 
(b)(2)(vi) of this interim final rule because the provisions in these 
conditions are addressed in other sections of the rule 
(Sec. 35.3555(c)(2), Sec. 35.3520(e)(5), and Sec. 35.3520(d)(2), 
respectively) as general requirements that all projects must meet to be 
eligible for assistance.
    The latter part of condition (2) stating that a project ``must 
address an actual public health problem with serious risks'' and 
condition (6) are specifically included in Sec. 35.3520 (b)(2)(vi). 
Condition (3) is clarified in Sec. 35.3520(b)(2)(vi) by indicating that 
projects to address existing public health problems associated with 
individual wells or surface water sources must be limited in scope to 
the specific geographic area affected by contamination. Condition (3) 
is also clarified in Sec. 35.3520(b)(2)(vi) by indicating that projects 
that create new regional community water systems by consolidating 
existing systems must be limited in scope to the service area of the 
systems being consolidated. The latter part of condition (4) stating 
that ``growth cannot be a substantial portion of the project'' is 
specifically included in Sec. 35.3520 (b)(2)(vi) of this interim final 
rule as an additional test that projects must meet to be eligible for 
assistance. As noted earlier, a general requirement for an applicant to 
receive DWSRF program funding is that a project must be sized only to 
accommodate a reasonable amount of growth expected over the life of the 
facility. However, if a substantial portion of a project to create a 
new system involves funding capacity for future populations anticipated 
by reasonable growth projections, then the project is not eligible. The 
purpose of conditions (3) and (4) is to focus the use of funds from the 
DWSRF program on solving existing public health problems rather than 
financing new development.

D. Ineligibility of Dams, Reservoirs, Water Rights, and Future 
Population Growth for Assistance From the Fund (40 CFR 35.3520(e)(1) 
Through (e)(3) and (e)(5))

    During development of the DWSRF Program Final Guidelines and this 
interim final rule, many comments were received on EPA's decision to 
make the construction and rehabilitation of dams and reservoirs and the 
purchase of water rights ineligible for assistance from the Fund. In 
making the decision to restrict

[[Page 48291]]

these types of projects and activities from funding, EPA considered the 
intent of Congress in passing the SDWA Amendments and, in particular, 
the required criteria of section 1452(a)(2) that financial assistance 
under the DWSRF program ``* * * may be used by a public water system 
only for expenditures * * * of a type or category which the 
Administrator has determined * * * will facilitate compliance with the 
national primary drinking water regulations applicable to the system 
under section 1412 or otherwise significantly further the health 
protection objectives of the Act.''
    EPA also considered the required criteria of section 1452(b)(3)(A) 
of the SDWA to focus limited dollars on projects needed to address the 
most serious risk to human health, to ensure that the nation's drinking 
water is safe through compliance with the national primary drinking 
water regulations, and to assist those systems with the greatest 
economic need. Examples of such projects include installation of 
filtration facilities to help systems meet the Surface Water Treatment 
Rule, treatment technologies to meet SDWA regulated contaminants, and 
consolidation of systems that fail to maintain adequate technical, 
financial, and managerial capacity.
    EPA believes that the foremost purpose of the construction and 
rehabilitation of dams and reservoirs and the purchase of water rights 
is not to improve drinking water quality, but to satisfy demand for 
drinking water. Providing DWSRF program assistance for these types of 
projects will not further the objectives Congress set out in the SDWA 
to the same extent as the other projects eligible under this interim 
final rule. The position that the construction and rehabilitation of 
dams and reservoirs and the purchase of water rights are ineligible for 
assistance from the Fund has been maintained in this interim final rule 
in Sec. 35.3520 (e)(1) through (e)(3).
    The DWSRF Program Final Guidelines and this interim final rule do 
allow for specific exceptions to the restrictions on using DWSRF 
program funds for the purchase of water rights and for the construction 
and rehabilitation of reservoirs. The exception to the restriction on 
the purchase of water rights is for those rights that are owned by a 
system that is being purchased through consolidation as part of a 
capacity development strategy. The exceptions to the restriction on 
reservoirs are finished water reservoirs and those reservoirs that are 
part of the treatment process and are on the property where the 
treatment facility is located.
    The DWSRF Program Final Guidelines and this interim final rule 
limit the use of DWSRF program funds for costs associated with 
population growth. Section 1452(g)(3) of the SDWA calls on EPA to 
publish guidance and regulations as may be necessary to carry out the 
program, including ``guidance to avoid the use of funds made available 
under * * * [section 1452] to finance the expansion of any public water 
system in anticipation of future population growth.'' In the 
legislative history to the SDWA Amendments, Congress explained that EPA 
is not to implement this provision in a manner that would ``* * * 
preclude the use of SRF financing for facilities with the capacity 
necessary to meet the objectives of the Safe Drinking Water Act for the 
population to be served by the facility over its useful life.'' [H. 
Conf. Rep. No. 104-741, at 89 (1996).]
    It is clear that Congress did not intend for DWSRF program funds to 
be used to expand drinking water facilities solely in anticipation of 
future population growth. However, when read together, the language of 
the SDWA and its legislative history demonstrate that Congress did 
allow for the use of DWSRF program funds to accommodate a reasonable 
amount of population growth, which at the time that funding is 
provided, is expected to occur over the useful life of a facility. This 
concept is reflected in this interim final rule in Sec. 35.3520(e)(5).

E. Inclusion of Eligible Project Reimbursement Costs Within Loans (40 
CFR 35.3525(a)(2))

    Several States wanted to have the flexibility to notify eligible 
privately-owned and publicly-owned systems that they will receive 
funding from the State, allow those systems to move ahead with 
construction, 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. This flexibility was particularly needed for 
privately-owned systems which cannot benefit from the refinancing 
provisions under section 1452(f)(2) of the SDWA.
    In response to State concerns, EPA proposed a policy on the 
eligibility of reimbursement of incurred costs for approved projects. 
This policy was published in the Federal Register (63 FR 32208) on June 
12, 1998, for a 30 day comment period. EPA also held a stakeholder 
meeting to discuss the policy. After consideration of comments, a final 
policy was published in the Federal Register (64 FR 1802) on January 
12, 1999. The final policy stated that a project (for a privately-owned 
or publicly-owned system) that has been given approval, authorization 
to proceed, or any similar action by the State prior to initiation of 
construction would 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 certain criteria. Planning 
and design and associated pre-project costs are eligible for 
reimbursement regardless of when the costs were incurred.
    A project must be on the State's fundable list, developed using a 
priority system approved by EPA. However, a project on the 
comprehensive list which is funded due to the bypass of a project on 
the fundable list may be eligible for reimbursement of costs incurred 
after the system has been informed that it will receive funding. 
Projects receiving reimbursement of incurred costs are also subject to 
all other DWSRF program requirements applicable to a recipient of 
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 have been made prior to the binding commitment. This 
interim final rule reflects the provisions in the final policy.

F. Assistance From the Fund for Disadvantaged Communities (40 CFR 
35.3525(b))

    Section 1452(d) of the SDWA allows a State to provide additional 
loan subsidies to benefit communities meeting the State's definition of 
``disadvantaged'' or which the State expects to become 
``disadvantaged'' as a result of the project, provided that ``* * * for 
each fiscal year, the total amount of loan subsidies made by a State * 
* * may not exceed 30 percent of the amount of the capitalization grant 
received by the State for the year.''
    This interim final rule clarifies EPA's interpretation of this 
provision which is that the 30 percent allowance for loan subsidies to 
disadvantaged communities refers to the amount of loan subsidies (e.g., 
loans which include principal forgiveness, negative interest rate 
loans) that can be provided from funds associated with a particular 
fiscal year's capitalization grant. If a State does not

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take the entire 30 percent allowance for loan subsidies associated with 
a particular fiscal year's capitalization grant, it cannot reserve the 
authority to take the remaining balance from future capitalization 
grants. For example, if a State indicates that it will use an amount 
equal to 20 percent of the amount of a capitalization grant for loan 
subsidies, it cannot reserve the authority to take an additional 10 
percent from a future capitalization grant. Loan subsidies in the form 
of reduced interest rate loans that are at or above zero percent do not 
fall under the 30 percent allowance.
    A State must indicate in its Intended Use Plan (IUP) how much of 
the 30 percent allowance in loan subsidies it plans to make available 
to disadvantaged communities. To the maximum extent practicable, a 
State must identify in its IUP the projects that will receive 
disadvantaged assistance and the respective amounts. A State can then 
provide loan subsidies for those projects it has identified in its IUP. 
Because this approach provides a great deal of flexibility to States, 
EPA believes that there should be constraints on the time period that 
States can have to commit funds taken for loan subsidies. Therefore, 
this interim final rule requires States to commit capitalization grant 
and required State match dollars taken for loan subsidies in accordance 
with the binding commitment requirements in Sec. 35.3550(e). In 
addition, States must commit any other dollars (e.g., principal and 
interest repayments, investment earnings) taken for loan subsidies to 
projects over the same time period during which binding commitments are 
made for the capitalization grant from which the allowance was taken.

G. Program Administration: Fees Paid Directly by an Assistance 
Recipient (40 CFR 35.3530(b)(2))

    Many States assess fees on assistance recipients to supplement 
program administration and other program costs. Examples of these fees 
include annual loan servicing fees, application fees, loan origination 
fees, and processing fees. A State may assess fees on an assistance 
recipient which are paid directly by the recipient (discussed in this 
section). A State may also assess fees on an assistance recipient and 
provide the recipient with the funds for the fees as principal in a 
loan (discussed in the next section).
    Fees assessed on assistance recipients, which include interest 
earned on fees, must be deposited into the Fund or into an account 
outside of the Fund. If the fees are deposited into the Fund, they are 
subject to the authorized uses of the Fund. If the fees are deposited 
into an account outside of the Fund, they must be used for program 
administration, other purposes for which capitalization grants can be 
awarded under section 1452, State match under sections 1452 (e) and 
(g)(2) of the SDWA, or combined financial administration of the DWSRF 
program and CWSRF program Funds where the programs are administered by 
the same State agency. Allowing fees to be used for combined financial 
administration enables States which administer the CWSRF and DWSRF 
programs under the same State agency to combine eligible funds to pay 
costs for financial oversight of the two programs and thereby ease 
their administrative burden. The uses of fees assessed on assistance 
recipients as provided in this interim final rule are consistent with 
the program income requirements of EPA's general grant regulations at 
40 CFR 31.25 and offer a great deal of flexibility to States.
    A State must provide information in its IUP on the rates and uses 
of fees it assesses on assistance recipients and give an accounting of 
the total dollar amount of funds it is holding in fee accounts. A State 
must establish in its Biennial Report that it has used the fees only 
for eligible purposes and must submit information on the total dollar 
amount in fee accounts as part of the detailed financial reports.

H. Program Administration: Fees Included as Principal in a Loan (40 CFR 
35.3530(b)(3))

    A State may assess fees on an assistance recipient and, within the 
principal of a loan, provide the recipient with the funds to pay the 
fees (i.e., the recipient pays the fees from the proceeds of the loan). 
EPA determined that such fees are permissible if they enable the State 
to make a loan which ``* * * facilitate(s) compliance with national 
primary drinking water regulations * * * or otherwise significantly 
further(s) the health protection objectives'' of the SDWA under section 
1452(a)(2). However, this interim final rule imposes requirements and 
limitations on the amount and use of fees included as principal in a 
loan.
    Fees included as principal in a loan, which include interest earned 
on fees, must be deposited into the Fund or into an account outside of 
the Fund. If the fees are deposited into the Fund, they are subject to 
the authorized uses of the Fund. If the fees are deposited into an 
account outside of the Fund, they must be used for program 
administration or other purposes for which capitalization grants can be 
awarded under section 1452. Fees included as principal in a loan cannot 
be used for State match under sections 1452 (e) and (g)(2) of the SDWA 
or combined financial administration of the DWSRF program and CWSRF 
program Funds. EPA believes that the authorized uses for fees included 
as principal in a loan offer a great deal of flexibility to States.
    After discussions with the State/EPA SRF Work Group during meetings 
in July 1998 and November 1998, the following three specific 
limitations on fees included as principal in a loan were included in 
this interim final rule: (1) Fees cannot be assessed on a disadvantaged 
community which receives a loan subsidy provided from the 30 percent 
allowance in Sec. 35.3525(b)(2); (2) fees cannot cause the effective 
rate of a loan (which includes both interest and fees) to exceed the 
market rate; and (3) fees cannot be assessed if the effective rate of a 
loan could reasonably be expected to cause a system to fail to meet the 
technical, financial, and managerial capability requirements under 
section 1452 of the SDWA.
    A State must provide information in its IUP on the rates and uses 
of fees included as principal in a loan and give an accounting of the 
total dollar amount of funds it is holding in fee accounts. A State 
must establish in its Biennial Report that it has used the fees only 
for eligible purposes and must submit information on the total dollar 
amount in fee accounts as part of the detailed financial reports.

I. Transfer and Cross-Collateralization of Funds Between the DWSRF and 
CWSRF Programs (40 CFR 35.3530 (c) Through (d))

    Section 302 of the SDWA authorizes a State to transfer up to 33 
percent of the amount of a fiscal year's DWSRF program capitalization 
grant to the CWSRF program or an equivalent amount from the CWSRF 
program to the DWSRF program. The Department of Veteran Affairs and 
Housing and Urban Development, and Independent Agencies Appropriations 
Acts, 1998 and 1999 (Pub. L. 105-65 and Pub. L. 105-276, respectively) 
authorize cross-collateralization between the DWSRF and CWSRF programs.
    EPA released a draft policy entitled ``Transfer/Cross-
collateralization Policy for the DWSRF and CWSRF'' in June 1998 which 
specifies the provisions that States must meet in order to gain EPA 
approval for incorporating transfers and cross-collateralization 
provisions into their programs. This draft policy was developed with 
substantial input from EPA Regional staff, the State/EPA SRF

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Work Group, and national stakeholder organizations. The final policy 
will be published in the Federal Register. This interim final rule 
includes the transfer and cross-collateralization requirements for both 
the DWSRF program and the CWSRF program.

J. Authorized Set-Aside Activities (40 CFR 35.3535(a)(2))

    As in the DWSRF Program Final Guidelines, set-aside funds may not 
be used for projects or project-related costs eligible for funding from 
the Fund or for those projects or project-related costs explicitly 
identified as ineligible for assistance from the Fund in this interim 
final rule. This requirement was included in this rule because EPA 
determined that projects that are eligible for loans or other types of 
assistance from the Fund should not also be eligible to receive 
assistance from the set-asides in the form of grants which would not be 
required to be repaid. In addition, set-aside funds should not be used 
to provide assistance to projects that are explicitly ineligible for 
assistance from the Fund since it has been determined that these types 
of projects will not further the objectives Congress set out in the 
SDWA to the same extent as the projects that are eligible in this 
interim final rule.
    During development of this interim final rule, several commentors 
indicated that the requirement that set-aside funds may not be used for 
any projects that are eligible or explicitly ineligible for assistance 
from the Fund is overly restrictive because there are some eligible 
project costs that States would want the flexibility to be able to 
finance from the set-asides. Specifically, commentors noted that they 
wanted the flexibility to provide grants to small systems for drinking 
water infrastructure planning and design as part of a State's technical 
assistance program, with the reasonable expectation that as a result of 
a grant, a recipient would then be in a position to apply for a loan 
from the Fund at a future time. In addition, commentors wanted the 
flexibility to provide grants to systems for projects that would assist 
in implementation of capacity development provisions.
    In response to commentor concerns, this interim final rule allows 
for two exceptions to the requirement that a State may not use set-
aside funds for those projects or project-related costs that are 
eligible or explicitly ineligible for assistance from the Fund. These 
exceptions are: (1) A State may use set-aside funds for project 
planning and design costs for small systems, and (2) a State may use 
set-aside funds for costs associated with restructuring a system as 
part of a capacity development strategy. EPA believes that these 
exceptions provide the flexibility that commentors wanted.

K. State Program Management Set-Aside Match Requirement (40 CFR 
35.3535(d)(2))

    Section 1452(g)(2) of the SDWA states that ``* * * each State may 
use up to an additional 10 percent of the funds allotted to the State 
under this section [for specified purposes] * * * if the State matches 
the expenditures with at least an equal amount of State funds. At least 
half of the match must be additional to the amount expended by the 
State for public water supervision in fiscal year 1993.'' This interim 
final rule states that ``* * * a State is authorized to use the amount 
of State funds it expended on its PWSS program in fiscal year 1993 
(including PWSS match) as a credit toward meeting its match 
requirement. The value of this credit can be up to, but not greater 
than, 50 percent of the amount of match that is required. After 
determining the value of the credit that it is eligible to receive, a 
State must provide the additional funds necessary to meet the remainder 
of the match requirement. The source of these additional funds can be 
State funds (excluding PWSS match) or documented in-kind services.''
    During development of this interim final rule, commentors had 
questions about how the match for the State program management set-
aside is specifically calculated. Suggestions were made to include a 
specific example of how to calculate the match requirement in this 
interim final rule. Rather than include a lengthy example within the 
text of this rule, EPA worked to make the language describing the match 
for the set-aside more clear than it had been in the DWSRF Program 
Final Guidelines. The Final Guidelines, which can still serve as a 
resource for States, does include a lengthy example that States may 
refer to if they have any questions.
    Commentors also suggested that a list of the specific types of in-
kind services that are eligible for a State to use to meet the 
remainder of the match requirement should be included in this interim 
final rule. EPA determined that listing all of the eligible types of 
in-kind services in this interim final rule would be unnecessarily 
limiting and that in-kind services are sufficiently addressed in the 
DWSRF Program Final Guidelines and specific questions can be handled by 
EPA on a case by case basis.

L.  Reserving Set-Aside Funds (40 CFR 35.3540(d))

    The DWSRF Program Final Guidelines allowed States to ``bank'' 
(i.e., reserve) certain set-aside funds and/or authority that it could 
not use in the current year for use in future years to give States 
flexibility in implementing set-aside activities. Several early 
capitalization grant applications indicated that States were reserving 
a high percentage of set-aside funds with the intention of using only a 
small percentage in the short-term and leaving the remaining funds as 
undrawn reserves. Because EPA was concerned that reserved set-aside 
funds would sit idle while needed infrastructure projects went 
unfunded, a proposed policy was developed to describe how set-aside 
funds should be managed in the DWSRF program. The proposal was 
distributed to EPA Regional staff, States, and the State/EPA SRF Work 
Group in February 1998. After several rounds of review and comment, an 
interim final policy entitled ``Management of Set-asides for the DWSRF 
Program'' was released and became effective on March 15, 1999.
    The interim final policy allowed a State to reserve set-aside funds 
from a capitalization grant and expend them over a period of time, 
provided that the State identifies the amount of funds reserved in the 
IUP and describes the use of the funds in workplans approved by EPA. 
With the exception of the local assistance and other State programs 
set-aside authorized under section 1452(k) of the SDWA, a State may 
also reserve the authority to take from future capitalization grant 
awards those set-aside funds that it has not included in workplans. The 
State must identify in its IUP the amount of authority reserved from a 
capitalization grant for future use.
    States can submit annual or multi-year workplans in accordance with 
schedules identified by EPA Regional staff to describe how funds will 
be used. The length of workplans must be less than four years, unless a 
longer term is approved by EPA, and must be updated if the State 
significantly changes planned activities or budgets. This interim final 
rule reflects the provisions in the interim final policy.

M. State Match Requirement (40 CFR 35.3550(g))

    This interim final rule reflects the requirement in section 1452(e) 
of the SDWA that a State deposit into the Fund an amount from State 
monies that equals at least 20 percent of each capitalization grant 
payment. However,

[[Page 48294]]

this interim final rule does not include the provision in section 
1452(e) which allowed States to defer their matching requirement for 
fiscal year 1997 appropriations. Specifically, for grant payments made 
to States from funds appropriated in fiscal year 1997, States were 
authorized to defer deposit of their matching amount to no later than 
September 30, 1999. This flexibility was provided to those States that 
needed additional time to secure State funding for the required 
matching amount. States were required to identify the source of the 
matching funds in their capitalization grant applications and to agree 
to provide the State match for grant payments already received from 
fiscal year 1997 appropriations by September 30, 1999. In addition, 
after September 30, 1999, States could not draw Federal dollars from 
the EPA Automated Clearing House (ACH) for projects until the deferred 
State match had been expended and the States reached proportionality 
with previously drawn Federal dollars.

N. Preparation of an IUP (40 CFR 35.3555(a))

    This interim final rule reflects the requirement in the DWSRF 
Program Final Guidelines that a State prepare an annual IUP as long as 
the Fund or set-aside accounts remain in operation. During development 
of this interim final rule, several commentors objected to this 
requirement because they believe that the SDWA only ties the 
preparation of an IUP to the award of a capitalization grant and is 
silent on what is required of States after capitalization ends. Section 
1452(b)(1) of the SDWA states that ``after providing for public review 
and comment, each State that has entered into a capitalization grant 
agreement pursuant to this section shall annually prepare a plan that 
identifies the intended uses of the amounts available to the State loan 
fund of the State.'' Thus, a State that has entered into an agreement 
to receive a capitalization grant under section 1452 must prepare an 
IUP each year, regardless of whether it receives a capitalization grant 
in that year.
    In addition, section 1452(c) requires that ``the fund corpus shall 
be available in perpetuity for providing financial assistance under 
this section.'' This provision shows that Congress intended for State 
DWSRF programs to continue after capitalization ends. The primary means 
by which the public and EPA can ensure that this provision and the 
intent of Congress is satisfied is through review of the IUP. 
Therefore, the language in this interim final rule has not been changed 
as a result of the comments received.

O. Meaningful Public Review of the IUP (40 CFR 35.3555(b))

    Section 1452(b)(1) of the SDWA requires a State to provide for 
public comment and review during the development of its IUP. Any State 
process that solicits input from a variety of interested parties, 
allows adequate time for the public to comment, and allows time for the 
State to address major comments meets the SDWA's public participation 
requirements for the IUP. This interim final rule reflects the 
requirement in the DWSRF Program Final Guidelines that a State seek 
``meaningful public review and comment'' during the development of its 
IUP. During development of this interim final rule, comments were 
received that EPA should define the term ``meaningful public review.''
    This interim final rule does not include specific requirements as 
to what constitutes ``meaningful public review'' of the IUP. Due to the 
variation among States, no single approach will work under all 
conditions. However, at a minimum, States should make an effort to 
include interested parties, such as environmental and public health 
groups, that extend beyond those on existing mailing lists when seeking 
public review. In addition, as a guide, States should strive to achieve 
the following objectives when seeking public review: (1) Assure that 
the public has the opportunity to understand official programs and 
proposed actions, and that the State fully considers the public's 
concerns; (2) assure that the State does not make any significant 
decision on any activity under section 1452 without consulting 
interested and affected segments of the public; (3) assure that the 
State action is as responsive as possible to public concerns; (4) 
encourage public involvement in implementing section 1452; (5) keep the 
public informed about significant issues and proposed project or 
program changes as they arise; (6) foster a spirit of openness and 
mutual trust between the State and the public; and (7) use all feasible 
means to create opportunities for public participation, and to 
stimulate and support public participation.

P. Priority System Requirements in the IUP (40 CFR 35.3555(c)(1))

    This interim final rule requires that the IUP ``* * * include a 
priority system for ranking individual projects for funding that 
provides sufficient detail for the public and EPA to readily understand 
the criteria used for ranking.'' During development of this interim 
final rule, several commentors indicated that EPA should not require a 
State to include its priority system in the IUP, but instead should 
allow a State to provide a summary of the priority system or a 
reference to where the priority system can be found. Commentors gave 
the following primary reasons for not wanting to include the priority 
system in the IUP: (1) Many of the priority systems are complex and are 
not readily understood by the public, especially if the systems are in 
regulation; (2) including the priority system within the text of the 
IUP simply elongates and clutters the IUP and discourages people from 
reading it; and (3) including the priority system gives the impression 
to the public that the State is seeking additional comments when, in 
actuality, the priority system has already undergone public review and 
comment.
    The language in this interim final rule has not been changed as a 
result of the comments received because EPA believes that the public 
should be given every opportunity to understand the basis for ranking 
projects. EPA believes that the language in this rule does not preclude 
a State that has a very complicated priority system which is difficult 
for the public to understand from developing a detailed summary that 
describes the criteria used to assess the priority for ranking 
individual projects, including points. In addition, if a State does not 
want to include the priority system within the text of the IUP, it can 
include the system as an attachment that is distributed with the IUP. 
Finally, a State can indicate in the IUP that the priority system was 
developed with public comment and therefore it is not taking additional 
comments, but the State is providing the information so that the public 
can understand the basis for ranking of projects.

Q. Cash Draw Rules (40 CFR 35.3560 and 35.3565)

    This interim final rule details the specific requirements for how 
States access capitalization grant funds through the EPA ACH, which is 
a Federal funds transfer system to electronically deposit funds into a 
grant recipient's bank account. In Sec. 35.3560 of this interim final 
rule, the general cash draw rules are provided for how States access 
capitalization grant funds through the ACH, including the formula for 
calculating the proportionate Federal share. In Sec. 35.3565 of this 
interim final rule, the specific cash draw rules are provided for how 
States access capitalization grant funds through the

[[Page 48295]]

ACH for each of the authorized types of assistance from the Fund.
    EPA published a Guide to Using EPA's Automated Clearing House for 
the DWSRF Program (EPA-832-B98-003) in September 1998 to explain, in 
more detail, the process States must use to access capitalization grant 
funds through the ACH. This Guide provides easy to understand examples, 
using sample capitalization grant amounts, of how to calculate the 
proportionate Federal share and how to calculate the cash draw ratios 
for each of the types of assistance from the Fund.
    In the future, the EPA ACH will be replaced by a new Federal funds 
transfer system called the Automated Standard Application for Payments 
(ASAP). This change to ASAP will not have any effect on the cash draw 
rules in this interim final rule.

R. Audit Requirements (40 CFR 35.3570(b))

    The DWSRF Program Final Guidelines, published in February 1997 
after release of the Single Audit Act Amendments of 1996, reflected 
EPA's previous audit strategy which was to require annual independent 
audits of the DWSRF program--a policy that was consistent with 
requirements in the CWSRF program. However, provisions of the Single 
Audit Act Amendments of 1996 necessitated changes to this strategy. 
Specifically, since independent audits were not required by the Single 
Audit Act Amendments of 1996, EPA revised its audit strategy to request 
voluntary agreements from States to conduct these audits. The strategy 
was based on EPA's belief that independent audits of financial 
statements, beyond the Single Audit Act, are important to ensure the 
financial integrity of the DWSRF program. On October 16, 1997, a 
memorandum entitled ``Clean Water and Drinking Water State Revolving 
Fund Financial Audit Strategy'' was released after discussions among 
representatives from EPA Headquarters and Regional Offices, the Office 
of the Inspector General, the Office of Management and Budget, and many 
States.
    Under the revised audit strategy for the DWSRF program, a State 
must comply with the provisions of the Single Audit Act Amendments of 
1996 and Office of Management and Budget's Circular A-133 and 
Compliance Supplement. States may agree to implement, on an annual 
basis, independent audits and document these agreements in the 
Operating Agreements or in other parts of the capitalization grant 
agreements. These independent audits are expected to be conducted 
according to Generally Accepted Government Auditing Standards (GAGAS) 
and provide an auditor's opinion on the DWSRF program financial 
statements, reports on internal controls, and reports on compliance 
with section 1452 of the Act, applicable regulations, and EPA's general 
grant requirements. Based on a determination by EPA, those States that 
do not conduct independent audits will be periodically audited by the 
EPA Office of Inspector General.
    For those States that conduct independent audits, the audit report 
should be completed and submitted to EPA within one year of the end of 
the fiscal year adopted by the State for the DWSRF program. 
Specifically, copies of the audit report should be submitted to the EPA 
DWSRF Regional Coordinator and to the Western Audit Division, 
Divisional Inspector General for Audit. This interim final rule 
reflects the provisions in the revised audit strategy. Exclusive of 
requirements associated with the Single Audit Act, a State must include 
detailed financial statements presenting the financial status of the 
DWSRF program in its Biennial Report.

S. Application of Federal Cross-Cutting Authorities (Cross-Cutters) (40 
CFR 35.3575)

    There are a number of Federal laws, executive orders, and 
government-wide policies that apply by their own terms to projects and 
activities receiving Federal financial assistance, regardless of 
whether the statute authorizing the assistance makes them applicable. 
These Federal cross-cutting authorities (i.e., cross-cutters) include 
Federal laws such as the Endangered Species Act (ESA) and the Age 
Discrimination Act (ADA). A few cross-cutters apply by their own terms 
only to the State as the grant recipient because the authorities 
explicitly limit their application to grant recipients.
    Federal cross-cutter requirements, which include environmental 
review requirements, must be applied to projects and activities 
receiving Federal dollars. Because each State's Fund consists of an 
indistinguishable combination of Federal, State, and recycled monies, 
EPA determined that Federal cross-cutter requirements must be applied 
to projects identified by the State whose cumulative funding is 
equivalent to the amount of the capitalization grant (i.e., equivalency 
projects). The cross-cutter discussion in the DWSRF Program Final 
Guidelines resulted in some confusion among States as to how cross-
cutter requirements must be applied to set-aside activities.
    Due to requirements related to the deposit of funds in the DWSRF 
program, almost all of the funds used to conduct set-aside activities 
are Federal dollars. Therefore, Federal cross-cutter requirements must 
be applied to all set-aside activities for which a State provides 
assistance from capitalization grant funds deposited into set-aside 
accounts. However, in the case of most set-aside activities, the cross-
cutter requirements will not be implicated because of the nature of the 
activities conducted under the set-asides. For example, if a State 
makes an expenditure from its set-aside accounts for the salaries of 
State employees, the requirements of cross-cutters such as the ESA and 
the National Historic Preservation Act (NHPA) are not implicated.
    This interim final rule reflects EPA's determination that the 
requirements of Federal cross-cutters must be applied to all activities 
for which a State provides assistance from capitalization grant funds 
deposited into set-aside accounts, to the extent that cross-cutter 
requirements are applicable. The requirements of Federal cross-cutters 
must also be applied to all projects for which a State provides 
assistance in amounts up to the amount of the capitalization grant 
deposited into the Fund. Federal anti-discrimination law requirements 
apply to all programs, projects, and activities for which a State 
provides assistance from the DWSRF program. Minority and women's 
business enterprise (MBE/WBE) procurement requirements and 
environmental review requirements (discussed in the following sections) 
apply to specific types of DWSRF program actions and are treated 
separately in this interim final rule.
    Generally, a State that elects to impose the requirements of the 
Federal cross-cutters to projects and activities in amounts that are 
more than the amount of the capitalization grant may only credit this 
excess to meet future cross-cutter requirements on assistance provided 
from the respective accounts. For example, if a State takes $2 million 
from a $10 million capitalization grant for set-aside activities and 
then proceeds to apply cross-cutter requirements to set-aside 
activities in an amount equal to $2.5 million (because the State has 
contributed $500,000 of its own funds to these activities), the State 
can only credit the excess $500,000 to meet future cross-cutter 
requirements for set-aside activities. A State cannot use this excess 
$500,000 to meet future cross-cutter requirements for projects funded 
from the Fund.

[[Page 48296]]

    This interim final rule provides clarification with respect to the 
role of States in ensuring compliance with Federal cross-cutters. 
Although EPA is ultimately responsible for ensuring compliance with 
Federal cross-cutters, primarily through DWSRF program oversight and 
approval, States review the projects and activities being funded under 
the program. Therefore, this interim final rule indicates that States 
are responsible for ensuring that assistance recipients comply with the 
cross-cutter requirements, including initiating any required 
consultations with State or Federal agencies responsible for individual 
cross-cutters. For example, before a Federally-assisted action that may 
affect an endangered species can begin, the Department of Interior's 
Fish and Wildlife Service must be consulted pursuant to section 7 of 
the ESA. States must notify EPA when it is necessary for the Agency to 
resolve any issues that may arise during consultations with other 
Federal agencies.
    A list of the Federal cross-cutters that apply to the DWSRF program 
is provided in Appendix A of the DWSRF Program Final Guidelines. This 
list is subject to change.

T.  Minority and Women's Business Enterprise (MBE/WBE) Procurement 
Requirements (40 CFR 35.3575(d))

    The requirements for the participation of MBE/WBEs apply to 
assistance recipients under EPA's fiscal year 1993 Appropriations Act 
(Public Law 102-389), which states that ``the Administrator of the 
Environmental Protection Agency shall, hereafter, to the fullest extent 
possible, ensure that at least 8 per centum of Federal funding for 
prime and subcontracts in support of authorized programs, including 
grants, loans and contracts * * * be made available to business 
concerns * * * owned or controlled by socially and economically 
disadvantaged individuals * * * [including] women.''
    This interim final rule requires that a State negotiate a fair 
share goal with the Regional Administrator (RA) of EPA for the 
participation of MBE/WBEs. The fair share goal must be based on the 
availability of MBE/WBEs in the relevant market area (i.e., 
availability of MBE/WBEs State-wide or availability of MBE/WBEs in 
particular geographic areas of the State) to do the work under the 
DWSRF program. Each capitalization grant agreement must describe how a 
State will comply with MBE/WBE procurement requirements, including how 
it will apply the fair share goal to assistance recipients to which the 
requirements apply and how it will assure that assistance recipients 
take the following six affirmative steps described in the general grant 
regulations at 40 CFR 31.36(e): (1) Include small, minority and women's 
businesses on solicitation lists; (2) assure that small, minority and 
women's businesses are solicited whenever they are potential sources; 
(3) divide total requirements, when economically feasible, into smaller 
tasks or quantities to permit maximum participation by small, minority 
and women's businesses; (4) establish delivery schedules, when the 
requirements of the work permits, which will encourage participation by 
small, minority and women's businesses; (5) use the services of the 
Small Business Administration and the Minority Business Development 
Agency of the U.S. Department of Commerce, as appropriate; and (6) 
require the contractor to take the affirmative steps in (1) through (5) 
if the contractor awards subagreements.
    Currently, the application of MBE/WBE requirements in the DWSRF 
program is described in a memorandum released on November 5, 1998, 
entitled ``Application of Minority and Women-Owned Business Enterprise 
Requirements in the Clean Water and Drinking Water State Revolving Fund 
Programs'' and in a memorandum released on December 29, 1998, entitled 
``FY 1999 MBE/WBE Terms and Conditions.'' These memoranda were released 
in response to the Supreme Court decision in Adarand Constructors, Inc. 
v. Pena, 515 U.S. 200 (1995), which was a case arising out of the 
Department of Transportation. As a result of that decision, it became 
necessary to make changes in the application of MBE/WBE procurement 
requirements in all EPA grant programs.
    These memoranda indicate that the fair share goal may be based 
either on the availability of MBE/WBEs State-wide or on the 
availability of MBE/WBEs in particular geographic areas of the State to 
do the work for procurement. The fair share goal applies to all 
procurement activities undertaken with assistance from the Fund or from 
set-aside accounts up to the amount of the capitalization grant (i.e., 
``identified procurement activities''). The State may elect to apply 
the fair share goal in place for the year in which the DWSRF program 
assistance is awarded to the recipient or for the year in which the 
procurement action occurs. The method a State elects to use to apply 
the fair share goal must be described in the Operating Agreement or in 
another part of the capitalization grant agreement. For identified 
procurement activities, the State must assure that the recipients of 
funding for these activities take the six affirmative steps as 
described in 40 CFR 31.36(e). A State must submit a MBE/WBE Utilization 
Report (EPA Form 5700-52A) to EPA within 30 days after the end of each 
Federal fiscal quarter.
    EPA's Office of Small and Disadvantaged Business Utilization 
(OSDBU) is in the process of a rulemaking to address the use of MBE/WBE 
firms in procurements under EPA financial assistance agreements and 
will consolidate these requirements in a new 40 CFR part 33. This 
rulemaking process will address the application of MBE/WBE requirements 
in the DWSRF program, including reporting requirements. When the 
OSDBU's rule is promulgated, the MBE/WBE requirements in that rule will 
supercede the requirements in this interim final rule.

U. Environmental Review Requirements (40 CFR 35.3580)

    As stated previously, cross-cutter requirements, which include 
environmental review requirements, must be applied to all set-aside 
activities for which a State provides assistance from capitalization 
grant funds deposited into set-aside accounts. In Sec. 35.3580 (c), it 
is indicated that a State may elect to apply the procedures at 40 CFR 
part 6 and related subparts, which set out the requirements for EPA 
actions which are subject to the National Environmental Policy Act 
(NEPA), or apply its own ``NEPA-like'' State environmental review 
process (SERP) for conducting environmental reviews, provided that 
specific elements are met. In implementing environmental review 
requirements applicable to the DWSRF program, EPA has taken an approach 
similar to that of the CWSRF program whereby States must develop and 
implement environmental provisions for projects and activities 
receiving assistance.
    EPA recognizes that there are types of activities conducted under 
set-asides that are not likely to have a potential environmental 
impact. Therefore, in this interim final rule, EPA has identified types 
of set-aside activities for which a State is not required to conduct 
environmental reviews because they are not likely to have a potential 
environmental impact. A State does not need to include provisions in 
its SERP for excluding these types of activities.
    EPA's Office of Federal Activities (OFA) is currently revising 40 
CFR part 6. However, this effort to revise 40 CFR part 6 is not 
expected to affect the environmental review requirement provisions in 
this interim final rule or

[[Page 48297]]

the SERPs that are currently approved and in effect in the States, 
since State environmental review procedures, although they may be based 
on 40 CFR part 6, are implemented under State statutes and authorities.

VIII. Administrative Requirements

A. Executive Order 12866: Regulatory Planning and Reviews

    Under Executive Order 12866, (58 FR 51735 (October 4, 1993)) the 
Agency must determine whether the regulatory action is ``significant'' 
and therefore subject to OMB review and the requirements of the 
Executive Order. The Executive Order defines ``significant regulatory 
action'' as one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    It has been determined that this rule is not a ``significant 
regulatory action'' under the terms of Executive Order 12866 and is 
therefore not subject to OMB review.

B. Regulatory Flexibility Act (RFA), As Amended by the Small Business 
Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 U.S.C. 601 et 
seq.

    Today's interim final rule is not subject to the RFA, which 
generally requires an agency to prepare a regulatory flexibility 
analysis for any rule that will have a significant economic impact on a 
substantial number of small entities. The RFA applies only to rules 
subject to notice and comment rulemaking requirements under the 
Administrative Procedure Act (APA) or any other statute. This rule is 
not subject to notice and comment requirements under the APA or any 
other statute. This rule pertains to grants which the APA expressly 
exempts from notice and comment rulemaking requirements. 5 U.S.C. 
553(a)(2). Moreover, the Safe Drinking Water Act, as amended, also does 
not require EPA to issue a notice of proposed rulemaking prior to 
issuing this rule.
    Although this interim final rule is not subject to the RFA, EPA 
nonetheless has assessed the potential of this rule to adversely impact 
small entities subject to the rule. The Agency has determined that this 
rule does not adversely impact small entities because small entities 
are not subject to this rule.

C. Paperwork Reduction Act

    The Office of Management and Budget (OMB) has approved the 
information collection requirements contained in this rule under the 
provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. and 
has assigned OMB control number 2040-0185. OMB approved the information 
collection requirements contained in the February 1997 DWSRF Program 
Final Guidelines. This rule does not contain any collection of 
information requirements beyond those already approved. Since this 
action imposes no new or additional information collection, reporting 
or record keeping requirements subject to the Paperwork Reduction Act, 
44 U.S.C. 3501 et seq., no information request was submitted to the OMB 
for review. OMB has approved ICR 2040-0185 for use with this rule and 
authorized the inclusion of the OMB control number in 40 CFR part 9.
    An Agency may not conduct or sponsor, and a person is not required 
to respond to a collection of information unless it displays a 
currently valid OMB control number. The OMB control numbers for EPA's 
regulations are listed in 40 CFR part 9 and 48 CFR Chapter 15. EPA is 
amending the table in 40 CFR part 9 of currently approved ICR control 
numbers issued by OMB for various regulations to list the information 
requirements contained in this rule.

D. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, EPA 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures to State, local, and tribal governments, in 
the aggregate, or to the private sector, of $100 million or more in any 
one year. Before promulgating an EPA rule for which a written statement 
is needed, section 205 of the UMRA generally requires EPA to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the least costly, most cost-effective or least burdensome alternative 
that achieves the objectives of the rule. The provisions of section 205 
do not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows EPA to adopt an alternative other than the least 
costly, most cost-effective or least burdensome alternative if the 
Administrator publishes with the final rule an explanation why that 
alternative was not adopted. Before EPA establishes any regulatory 
requirements that may significantly or uniquely affect small 
governments, including tribal governments, it must have developed under 
section 203 of the UMRA a small government agency plan. The plan must 
provide for notifying potentially affected small governments, enabling 
officials of affected small governments to have meaningful and timely 
input in the development of EPA regulatory proposals with significant 
Federal intergovernmental mandates, and informing, educating, and 
advising small governments on compliance with the regulatory 
requirements.
    Today's rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, or tribal 
governments or the private sector. The UMRA excludes from the 
definition of ``Federal intergovernmental mandate'' duties that arise 
from conditions of Federal assistance. Thus, today's rule is not 
subject to the requirements of sections 202 and 205 of the UMRA. EPA 
has determined that this rule contains no regulatory requirements that 
might significantly or uniquely affect small governments. Small 
governments are not subject to this rule, therefore it will not 
significantly or uniquely affect them. Many small governments will 
actually benefit through receipt of assistance from the DWSRF program. 
Thus, today's rule is not subject to the requirements of section 203 of 
the UMRA.

E. National Technology Transfer and Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (``NTTAA''), Public Law 104-113, section 12(d) (15 U.S.C. 
272 note) directs EPA to use voluntary consensus standards in its 
regulatory activities unless to do so would be inconsistent with 
applicable law or otherwise impractical. Voluntary consensus standards 
are technical standards (e.g., materials specifications, test methods, 
sampling procedures, and business practices) that are developed or 
adopted by voluntary consensus standards bodies. The NTTAA directs EPA 
to provide Congress, through OMB, explanations when the Agency decides

[[Page 48298]]

not to use available and applicable voluntary consensus standards.
    This action does not involve technical standards. Therefore, EPA 
did not consider the use of any voluntary consensus standards.

F. Congressional Review Act

    The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the 
Small Business Regulatory Enforcement Fairness Act of 1996, generally 
provides that before a rule may take effect, the agency promulgating 
the rule must submit a rule report, which includes a copy of the rule, 
to each House of the Congress and to the Comptroller General of the 
United States. EPA will submit a report containing this rule and other 
required information to the U.S. Senate, the U.S. House of 
Representatives, and the Comptroller General of the United States prior 
to publication of the rule in the Federal Register. A major rule cannot 
take effect until 60 days after it is published in the Federal 
Register. This action is not a ``major rule'' as defined by 5 U.S.C. 
804(2). This rule will be effective August 7, 2000.

G. Executive Order 13132: Federalism

    Executive Order 13132, entitled ``Federalism'' (64 FR 43255, August 
10, 1999), requires EPA to develop an accountable process to ensure 
``meaningful and timely input by State and local officials in the 
development of regulatory policies that have federalism implications.'' 
``Policies that have federalism implications'' is defined in the 
Executive Order to include regulations that have ``substantial direct 
effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government.''
    Under Section 6 of Executive Order 13132, EPA may not issue a 
regulation that has federalism implications, that imposes substantial 
direct compliance costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by State and local governments, or EPA 
consults with State and local officials early in the process of 
developing the proposed regulation. EPA also may not issue a regulation 
that has federalism implications and that preempts State law, unless 
the Agency consults with State and local officials early in the process 
of developing the proposed regulation.
    This interim final rule does not have federalism implications. It 
will not have substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government, as specified in Executive Order 13132. This interim final 
rule mainly codifies and makes minor changes to the DWSRF Program Final 
Guidelines under which the program has been operating since 1997. Apart 
from the minor changes, this rule adds new provisions that increase 
State flexibility, so it does not have federalism implications as that 
phrase is defined for purposes of Executive Order 13132. Further, 
because this is a rule that primarily conditions the use of Federal 
assistance, it does not impose substantial direct compliance costs on 
the States. Thus, the requirements of section 6 of the Executive Order 
do not apply to this rule.
    Although section 6 of Executive Order 13132 does not apply to this 
rule, EPA did consult with representatives of State governments in 
developing this rule. Specifically, members of a State/EPA SRF Work 
Group comprised of State DWSRF managers, State CWSRF managers, and 
managers of State financial agencies were given the opportunity to 
review and comment on drafts of this rule. In addition, stakeholders, 
including representatives from State government agencies and State 
government organizations, were given an opportunity to comment on a 
draft of the rule which was posted on the Internet for public comment. 
A summary of the concerns raised during that consultation and EPA's 
response to those concerns is provided in section VII. of this 
preamble.

H. Executive Order 13045: Children's Health

    Executive Order 13045, ``Protection of Children from Environmental 
Health Risks and Safety Risks'' (62 FR 19885, April 23, 1997), applies 
to any rule that: (1) Is determined to be ``economically significant'' 
as defined under Executive Order 12866, and (2) concerns an 
environmental health or safety risk that EPA has reason to believe may 
have a disproportionate effect on children. If the regulatory action 
meets both criteria, the Agency must evaluate the environmental health 
or safety effects of the planned rule on children, and explain why the 
planned regulation is preferable to other potentially effective and 
reasonably feasible alternatives considered by the Agency.
    This interim final rule is not subject to Executive Order 13045 
because it is not ``economically significant'' as defined under 
Executive Order 12866. Further, it does not concern an environmental 
health or safety risk that EPA has reason to believe may have a 
disproportionate effect on children.

I. Executive Order 13084: Consultation and Coordination With Indian 
Tribal Governments

    Under Executive Order 13084, EPA may not issue a regulation that is 
not required by statute, that significantly or uniquely affects the 
communities of Indian tribal governments, and that imposes substantial 
direct compliance costs on those communities, unless the Federal 
government provides the funds necessary to pay the direct compliance 
costs incurred by the tribal governments, or EPA consults with those 
governments. If EPA complies by consulting, Executive Order 13084 
requires EPA to provide to the Office of Management and Budget, in a 
separately identified section of the preamble to the rule, a 
description of the extent of EPA's prior consultation with 
representatives of affected tribal governments, a summary of the nature 
of their concerns, and a statement supporting the need to issue the 
regulation. In addition, Executive Order 13084 requires EPA to develop 
an effective process permitting elected officials and other 
representatives of Indian tribal governments ``to provide meaningful 
and timely input in the development of regulatory policies on matters 
that significantly or uniquely affect their communities.''
    Today's rule does not significantly or uniquely affect the 
communities of Indian tribal governments, nor does it impose 
substantial direct compliance costs on them. This rule only applies to 
each of the 50 States and the Commonwealth of Puerto Rico that receive 
capitalization grants and are authorized to establish a Fund under 
section 1452 of the Safe Drinking Water Act, as amended, 42 U.S.C. 
300j-12. Accordingly, the requirements of section 3(b) of Executive 
Order 13084 do not apply to this rule.

J. Executive Order 12898: Environmental Justice

    Under Executive Order 12898, ``Federal Actions to Address 
Environmental Justice in Minority Populations and Low-Income 
Populations,'' as well as through EPA's National Environmental Justice 
Advisory Council, EPA has undertaken to incorporate environmental 
justice into its policies and programs. EPA is committed to addressing 
environmental justice concerns, and is assuming a leadership role in 
environmental justice initiatives to enhance environmental quality for 
all residents of the United States. The Agency's goals are to ensure

[[Page 48299]]

that no segment of the population, regardless of race, color, national 
origin, or income, bears disproportionately high and adverse human 
health and environmental effects as a result of EPA's policies, 
programs, and activities, and all people live in clean and sustainable 
communities.
    No action from this rule will have a disproportionately high and 
adverse human health and environmental effect on any segment of the 
population. In addition, this rule does not impose substantial direct 
compliance costs on those communities. Accordingly, the requirements of 
Executive Order 12898 do not apply.

List of Subjects

40 CFR Part 9

    Environmental protection, Reporting and recordkeeping requirements.

40 CFR Part 35

    Environmental protection, Drinking water, Grant programs--
environmental protection, Public health, Safe drinking water act, State 
revolving funds, Water supply.

    Dated: July 31, 2000.
Carol M. Browner,
Administrator.

    For the reasons set out in the preamble, EPA is proposing to amend 
Title 40, chapter 1 of the Code of Federal Regulations to read as 
follows:

PART 9--[AMENDED]

    1. The authority citation for part 9 continues to read as follows:

    Authority: 7 U.S.C. 135 et seq., 136-136y; 15 U.S.C. 2001, 2003, 
2005, 2006, 2601-2671; 21 U.S.C. 331j, 346a, 348; 31 U.S.C. 9701; 33 
U.S.C. 1251 et seq., 1311, 1313d, 1314, 1318, 1321, 1326, 1330, 
1342, 1344, 1345 (d) and (e), 1361; E.O. 11735, 38 FR 21243, 3 CFR, 
1971-1975 Comp. p. 973; 42 U.S.C. 241, 242b, 243, 246, 300f, 300g, 
300g-1, 300g-2, 300g-3, 300g-4, 300g-5, 300g-6, 300j-1, 300j-2, 
300j-3, 300j-4, 300j-9, 1857 et seq., 6901-6992k, 7401-7671q, 7542, 
9601-9657, 11023, 11048.

    2. In Sec. 9.1 the table is amended under the indicated heading by 
adding new entries in numerical order to read as follows:


Sec. 9.1  OMB approvals under the Paperwork Reduction Act.

* * * * *

------------------------------------------------------------------------
                    40 CFR citation                      OMB control No.
------------------------------------------------------------------------
 
*                  *                  *                  *
                  *                  *                  *
Drinking Water State Revolving Funds..................
 
*                  *                  *                  *
                  *                  *                  *
35.3540 (c)...........................................         2040-0185
35.3545 (a)-(f).......................................         2040-0185
35.3550 (a)-(p).......................................         2040-0185
35.3555 (a)-(d).......................................         2040-0185
35.3560 (a), (d)-(g)..................................         2040-0185
35.3565 (a)-(f).......................................         2040-0185
35.3570 (a)-(d).......................................         2040-0185
35.3575 (a)-(e).......................................         2040-0185
35.3580 (a)-(h).......................................         2040-0185
35.3585 (b)-(c).......................................         2040-0185
 
*                  *                  *                  *
                  *                  *                  *
------------------------------------------------------------------------

PART 35--STATE AND LOCAL ASSISTANCE

    3. Part 35 is amended by adding Subpart L to read as follows:

Subpart L--Drinking Water State Revolving Funds

Sec.
35.3500   Purpose, policy, and applicability.
35.3505   Definitions.
35.3510   Establishment of the DWSRF program.
35.3515   Allotment and withholdings of funds.
35.3520   Systems, projects, and project-related costs eligible for 
assistance from the Fund.
35.3525   Authorized types of assistance from the Fund.
35.3530   Limitations on uses of the Fund.
35.3535   Authorized set-aside activities.
35.3540   Requirements for funding set-aside activities.
35.3545   Capitalization grant agreement.
35.3550   Specific capitalization grant agreement requirements.
35.3555   Intended Use Plan (IUP).
35.3560   General payment and cash draw rules.
35.3565   Specific cash draw rules for authorized types of 
assistance from the Fund.
35.3570   Reports and audits.
35.3575   Application of Federal cross-cutting authorities (cross-
cutters).
35.3580   Environmental review requirements.
35.3585   Compliance assurance procedures.

Appendix A to Subpart L--Criteria for evaluating a State's proposed 
NEPA-like process.

Subpart L--Drinking Water State Revolving Funds

    Authority: Section 1452 of the Safe Drinking Water Act, as 
amended, 42 U.S.C. 300j-12.


Sec. 35.3500  Purpose, policy, and applicability.

    (a) This subpart codifies and implements requirements for the 
national Drinking Water State Revolving Fund program under section 1452 
of the Safe Drinking Water Act, as amended in 1996. It applies to 
States (i.e., each of the 50 States and the Commonwealth of Puerto 
Rico) which receive capitalization grants and are authorized to 
establish a Fund under section 1452. The purpose of this subpart is to 
ensure that each State's program is designed and operated in such a 
manner as to further the public health protection objectives of the 
Safe Drinking Water Act, promote the efficient use of all funds, and 
ensure that the Fund corpus is available in perpetuity for providing 
financial assistance to public water systems.
    (b) This subpart supplements section 1452 of the Safe Drinking 
Water Act by codifying statutory and program requirements that were 
published in the Final Guidelines for the Drinking Water State 
Revolving Fund program (EPA 816-R-97-005) signed by the Assistant 
Administrator for Water on February 28,

[[Page 48300]]

1997, as well as in subsequent policies. This subpart also supplements 
general grant regulations at 40 CFR part 31 which contain 
administrative requirements that apply to governmental recipients of 
Environmental Protection Agency (EPA) grants and subgrants. EPA will 
not impose additional major program requirements without providing an 
opportunity for affected parties to comment.
    (c) EPA intends to implement the national Drinking Water State 
Revolving Fund program in a manner that preserves for States a high 
degree of flexibility to operate their programs in accordance with each 
State's unique needs and circumstances. To the maximum extent 
practicable, EPA also intends to administer the financial aspects of 
the national Drinking Water State Revolving Fund program in a manner 
that is consistent with the policies and procedures of the national 
Clean Water State Revolving Fund program established under Title VI of 
the Clean Water Act, as amended, 33 U.S.C. 1381-1387.


Sec. 35.3505  Definitions.

    The following definitions apply to terms used in this subpart:
    Act. The Safe Drinking Water Act (Public Law 93-523), as amended in 
1996 (Public Law 104-182). 42 U.S.C. 300f et seq.
    Administrator. The Administrator of the EPA or an authorized 
representative.
    Allotment. Amount available to a State from funds appropriated by 
Congress to carry out section 1452 of the Act.
    Automated Clearing House (ACH). A Federal payment mechanism that 
transfers cash to recipients of Federal assistance using electronic 
transfers from the Treasury through the Federal Reserve System.
    Binding commitment. A legal obligation by the State to an 
assistance recipient that defines the terms for assistance from the 
Fund.
    Capitalization grant. An award by EPA of funds to a State for 
purposes of capitalizing that State's Fund and for other purposes 
authorized in section 1452 of the Act.
    Cash draw. The transfer of cash from the Treasury through the ACH 
to the DWSRF program. Upon a State's request for a cash draw, the 
Treasury will transfer funds to the DWSRF program account established 
in the State's bank.
    CWSRF program. Each State's clean water state revolving fund 
program authorized under Title VI of the Clean Water Act, as amended, 
33 U.S.C. 1381-1387.
    Disadvantaged community. The entire service area of a public water 
system that meets affordability criteria established by the State after 
public review and comment.
    Disbursement. The transfer of cash from the DWSRF program account 
established in the State's bank to an assistance recipient.
    DWSRF program. Each State's drinking water state revolving fund 
program authorized under section 1452 of the Act, as amended, 42 U.S.C. 
300j-12. This term includes the Fund and set-asides.
    Fund. A revolving account into which a State deposits DWSRF program 
funds (e.g., capitalization grants, State match, repayments, net bond 
proceeds, interest earnings, etc.) for the purposes of providing loans 
and other types of assistance for drinking water infrastructure 
projects.
    Intended Use Plan (IUP). A document prepared annually by a State, 
after public review and comment, which identifies intended uses of all 
DWSRF program funds and describes how those uses support the overall 
goals of the DWSRF program.
    Net bond proceeds. The funds raised from the sale of the bonds 
minus issuance costs (e.g., the underwriting discount, underwriter's 
legal counsel fees, bond counsel fee, and other costs incidental to the 
bond issuance).
    Payment. An action taken by EPA to increase the amount of funds 
available for cash draw through the ACH. A payment is not a transfer of 
cash to the State, but an authorization by EPA to make capitalization 
grant funds available for transfer to a State after the State submits a 
cash draw request.
    Public water system. A system as defined in 40 CFR 141.2. A public 
water system is either a ``community water system'' or a ``noncommunity 
water system'' as defined in 40 CFR 141.2.
    Regional Administrator (RA). The Administrator of the appropriate 
Regional Office of the EPA or an authorized representative of the 
Regional Administrator.
    Set-asides. State and local activities identified in sections 
1452(g)(2) and (k) of the Act for which a portion of a capitalization 
grant may be used.
    Small system. A public water system that regularly serves 10,000 or 
fewer persons.
    State. Each of the 50 States and the Commonwealth of Puerto Rico, 
which receive capitalization grants and are authorized to establish a 
Fund under section 1452 of the Act.


Sec. 35.3510  Establishment of the DWSRF program.

    (a) General. To be eligible to receive a capitalization grant, a 
State must establish a Fund and comply with the other requirements of 
section 1452 of the Act and this subpart.
    (b) Administration. Capitalization grants must be awarded to an 
agency of the State that is authorized to enter into capitalization 
grant agreements with EPA, accept capitalization grant awards made 
under section 1452 of the Act, and otherwise manage the Fund in 
accordance with the requirements and objectives of the Act and this 
subpart. The State agency that is awarded the capitalization grant 
(i.e., grantee) is accountable for the use of the funds provided in the 
capitalization grant agreement under general grant regulations at 40 
CFR part 31.
    (1) The authority to establish assistance priorities and to carry 
out oversight and related activities of the DWSRF program, other than 
financial administration of the Fund, must reside with the State agency 
having primary responsibility for administration of the State's public 
water system supervision (PWSS) program (i.e., primacy) after 
consultation with other appropriate State agencies.
    (2) If a State is eligible to receive a capitalization grant but 
does not have primacy, the Governor will determine which State agency 
will have the authority to establish priorities for financial 
assistance from the Fund. Evidence of the Governor's determination must 
be included with the capitalization grant application.
    (3) If more than one State agency participates in implementation of 
the DWSRF program, the roles and responsibilities of each agency must 
be described in a Memorandum of Understanding or interagency agreement.
    (c) Combined financial administration. A State may combine the 
financial administration of the Fund with the financial administration 
of any other revolving fund established by the State if otherwise not 
prohibited by State law under which the Fund was established. A State 
must assure that all monies in the Fund, including capitalization 
grants, State match, net bond proceeds, loan repayments, and interest 
are separately accounted for and used solely for the purposes specified 
in section 1452 of the Act and this subpart. Funds available from the 
administration and technical assistance set-aside may not be used for 
combined financial administration of any other revolving fund.

[[Page 48301]]

    (d) Use of funds. (1) Assistance provided to a public water system 
from the DWSRF program may be used only for expenditures that will 
facilitate compliance with national primary drinking water regulations 
applicable under section 1412 or otherwise significantly further the 
public health protection objectives of the Act.
    (2) The inability or failure of any public water system to receive 
assistance from the DWSRF program, or any delay in obtaining 
assistance, does not alter the obligation of the system to comply in a 
timely manner with all applicable drinking water standards and 
requirements of section 1452 of the Act.


Sec. 35.3515  Allotment and withholdings of funds.

    (a) Allotment. (1) General. Each State will receive a minimum of 
one percent of the funds available for allotment to all of the States.
    (2) Allotment formula. Funds available to States from fiscal year 
1998 appropriations and subsequent appropriations are allotted 
according to a formula that reflects the infrastructure needs of public 
water systems identified in the most recent Needs Survey submitted in 
accordance with section 1452(h) of the Act.
    (3) Period of availability. Funds are available for obligation to 
States during the fiscal year in which they are authorized and during 
the following fiscal year. The amount of any allotment not obligated to 
a State by EPA at the end of this period of availability will be 
reallotted to eligible States based on the formula originally used to 
allot these funds, except that the Administrator may reserve up to 10 
percent of any funds available for reallotment to provide additional 
assistance to Indian Tribes. In order to be eligible to receive 
reallotted funds, a State must have been obligated all funds it is 
eligible to receive from EPA during the period of availability.
    (4) Loss of primacy. The following provisions do not apply to any 
State that did not have primacy as of August 6, 1996:
    (i) A State may not receive a capitalization grant from allotments 
that have been made if the State had primacy and subsequently loses 
primacy.
    (ii) For a State that loses primacy, the Administrator may reserve 
funds from the State's allotment for use by EPA to administer primacy 
in that State. The balance of the funds not used by EPA to administer 
primacy will be reallotted to the other States.
    (iii) A State will be eligible for future allotments from funds 
appropriated in the next fiscal year after primacy is restored.
    (b) Withholdings.--(1) General. EPA will withhold funds under each 
of the following provisions:
    (i) Capacity development authority. EPA will withhold 20 percent of 
a State's allotment from any State that has not obtained the legal 
authority or other means to ensure that all new community water systems 
and new nontransient, noncommunity water systems commencing operations 
after October 1, 1999, demonstrate technical, financial, and managerial 
capacity with respect to each national primary drinking water 
regulation in effect, or likely to be in effect, on the date of 
commencement of operations. The determination of withholding will be 
based on an assessment of the status of the State program as of October 
1 of the fiscal year for which the funds were allotted.
    (ii) Capacity development strategy. EPA will withhold funds from 
any State unless the State is developing and implementing a strategy to 
assist public water systems in acquiring and maintaining technical, 
financial, and managerial capacity. The amount of a State's allotment 
that will be withheld is 10 percent for fiscal year 2001, 15 percent 
for fiscal year 2002, and 20 percent for each subsequent fiscal year. 
The determination of withholding will be based on an assessment of the 
status of the State strategy as of October 1 of the fiscal year for 
which the funds were allotted. Decisions of a State regarding any 
particular public water system as part of a capacity development 
strategy are not subject to review by EPA and may not serve as a basis 
for withholding funds.
    (iii) Operator certification program. Beginning on February 5, 
2001, EPA will withhold 20 percent of a State's allotment unless the 
State has adopted and is implementing a program for certifying 
operators of community and nontransient, noncommunity public water 
systems that meets the requirements of section 1419 of the Act. The 
determination of withholding will be based on an assessment of the 
status of the State program for each fiscal year.
    (2) Maximum withholdings. The maximum amount of funds that will be 
withheld if a State fails to meet the requirements of both the capacity 
development authority and the capacity development strategy provisions 
is 20 percent of the allotment in any fiscal year. The maximum amount 
of funds that will be withheld if a State fails to meet the 
requirements of the operator certification program provision and either 
the capacity development authority provision or the capacity 
development strategy provision is 40 percent of the allotment in any 
fiscal year.
    (3) Reallotment of withheld funds. The Administrator will reallot 
withheld funds to eligible States based on the formula originally used 
to allot these funds. In order to be eligible to receive reallotted 
funds under the withholding provisions, a State must have been 
obligated all funds it is eligible to receive from EPA during the 
period of availability. A State that has funds withheld under any one 
of the withholding provisions in paragraphs (b)(1)(i) through 
(b)(1)(iii) of this section is not eligible to receive reallotted funds 
made available by that provision.
    (4) Termination of withholdings. A withholding will cease to apply 
to funds appropriated in the next fiscal year after a State complies 
with the specific provision under which funds were withheld.


Sec. 35.3520  Systems, projects, and project-related costs eligible for 
assistance from the Fund.

    (a) Eligible systems. Assistance from the Fund may only be provided 
to:
    (1) Privately-owned and publicly-owned community water systems and 
non-profit noncommunity water systems.
    (2) Projects that will result in the creation of a community water 
system in accordance with paragraph (b)(2)(vi) of this section.
    (3) Systems referred to in section 1401(4)(B) of the Act for the 
purposes of point of entry or central treatment under section 
1401(4)(B)(i)(III).
    (b) Eligible projects.--(1) General. Projects that address present 
or prevent future violations of health-based drinking water standards 
are eligible for assistance. These include projects needed to maintain 
compliance with existing national primary drinking water regulations 
for contaminants with acute and chronic health effects. Projects to 
replace aging infrastructure are eligible for assistance if they are 
needed to maintain compliance or further the public health protection 
objectives of the Act.
    (2) Only the following project categories are eligible for 
assistance from the Fund:
    (i) Treatment. Examples of projects include installation or upgrade 
of facilities to improve the quality of drinking water to comply with 
primary or secondary standards and point of entry or central treatment 
under section 1401(4)(B)(i)(III) of the Act.
    (ii) Transmission and distribution. Examples of projects include

[[Page 48302]]

installation or replacement of transmission and distribution pipes to 
improve water pressure to safe levels or to prevent contamination 
caused by leaks or breaks in the pipes.
    (iii) Source. Examples of projects include rehabilitation of wells 
or development of eligible sources to replace contaminated sources.
    (iv) Storage. Examples of projects include installation or upgrade 
of eligible storage facilities, including finished water reservoirs, to 
prevent microbiological contaminants from entering a public water 
system.
    (v) Consolidation. Eligible projects are those needed to 
consolidate water supplies where, for example, a supply has become 
contaminated or a system is unable to maintain compliance for 
technical, financial, or managerial reasons.
    (vi) Creation of new systems. Eligible projects are those that, 
upon completion, will create a community water system to address 
existing public health problems with serious risks caused by unsafe 
drinking water provided by individual wells or surface water sources. 
Eligible projects are also those that create a new regional community 
water system by consolidating existing systems that have technical, 
financial, or managerial difficulties. Projects to address existing 
public health problems associated with individual wells or surface 
water sources must be limited in scope to the specific geographic area 
affected by contamination. Projects that create new regional community 
water systems by consolidating existing systems must be limited in 
scope to the service area of the systems being consolidated. A project 
must be a cost-effective solution to addressing the problem. A State 
must ensure that the applicant has given sufficient public notice to 
potentially affected parties and has considered alternative solutions 
to addressing the problem. Capacity to serve future population growth 
cannot be a substantial portion of a project.
    (c) Eligible project-related costs. In addition to costs needed for 
the project itself, the following project-related costs are eligible 
for assistance from the Fund:
    (1) Costs for planning and design and associated pre-project costs. 
A State that makes a loan for only planning and design is not required 
to provide assistance for completion of the project.
    (2) Costs for the acquisition of land only if needed for the 
purposes of locating eligible project components. The land must be 
acquired from a willing seller.
    (3) Costs for restructuring systems that are in significant 
noncompliance with any national primary drinking water regulation or 
variance or that lack the technical, financial, and managerial 
capability to ensure compliance with the requirements of the Act, 
unless the systems are ineligible under paragraph (d)(2) or (d)(3) of 
this section.
    (d) Ineligible systems. Assistance from the Fund may not be 
provided to:
    (1) Federally-owned public water systems and for-profit 
noncommunity water systems.
    (2) Systems that lack the technical, financial, and managerial 
capability to ensure compliance with the requirements of the Act, 
unless the assistance will ensure compliance and the owners or 
operators of the systems agree to undertake feasible and appropriate 
changes in operations to ensure compliance over the long-term.
    (3) Systems that are in significant noncompliance with any national 
primary drinking water regulation or variance, unless:
    (i) The purpose of the assistance is to address the cause of the 
significant noncompliance and will ensure that the systems return to 
compliance; or
    (ii) The purpose of the assistance is unrelated to the cause of the 
significant noncompliance and the systems are on enforcement schedules 
(for maximum contaminant level and treatment technique violations) or 
have compliance plans (for monitoring and reporting violations) to 
return to compliance.
    (e) Ineligible projects. The following projects are ineligible for 
assistance from the Fund:
    (1) Dams or rehabilitation of dams.
    (2) Water rights, except if the water rights are owned by a system 
that is being purchased through consolidation as part of a capacity 
development strategy.
    (3) Reservoirs or rehabilitation of reservoirs, except for finished 
water reservoirs and those reservoirs that are part of the treatment 
process and are on the property where the treatment facility is 
located.
    (4) Projects needed primarily for fire protection.
    (5) Projects needed primarily to serve future population growth. 
Projects must be sized only to accommodate a reasonable amount of 
population growth expected to occur over the useful life of the 
facility.
    (6) Projects that have received assistance from the national set-
aside for Indian Tribes and Alaska Native Villages under section 
1452(i) of the Act.
    (f) Ineligible project-related costs. The following project-related 
costs are ineligible for assistance from the Fund:
    (1) Laboratory fees for routine compliance monitoring.
    (2) Operation and maintenance expenses.


Sec. 35.3525  Authorized types of assistance from the Fund.

    A State may only provide the following types of assistance from the 
Fund:
    (a) Loans. (1) A State may make loans at or below the market 
interest rate, including zero interest rate loans. Loans may be awarded 
only if:
    (i) An assistance recipient begins annual repayment of principal 
and interest no later than one year after project completion. A project 
is completed when operations are initiated or are capable of being 
initiated.
    (ii) A recipient completes loan repayment no later than 20 years 
after project completion except as provided in paragraph (b)(3) of this 
section.
    (iii) A recipient establishes a dedicated source of revenue for 
repayment of the loan which is consistent with local ordinances and 
State laws or, for privately-owned systems, a recipient demonstrates 
that there is adequate security to assure repayment of the loan.
    (2) A State may include eligible project reimbursement costs within 
loans if:
    (i) A system received approval, authorization to proceed, or any 
similar action by a State prior to initiation of project construction 
and the construction costs were incurred after such State action; and
    (ii) The project met all of the requirements of this subpart and 
was 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 in accordance with Sec. 35.3555(c)(2)(ii) may be 
eligible for reimbursement of costs incurred after the system has been 
informed that it will receive funding.
    (3) A State may include eligible planning and design and other 
associated pre-project costs within loans regardless of when the costs 
were incurred.
    (4) All payments of principal and interest on each loan must be 
credited to the Fund.
    (5) Of the total amount available for assistance from the Fund each 
year, a State must make at least 15 percent available solely for 
providing loan assistance to small systems, to the extent such funds 
can be obligated for eligible projects. A State that provides 
assistance in an amount that is greater

[[Page 48303]]

than 15 percent of the available funds in one year may credit the 
excess toward the 15 percent requirement in future years.
    (6) A State may provide incremental assistance for a project (e.g., 
for a particularly large, expensive project) over a period of years.
    (b) Assistance to disadvantaged communities. (1) A State may 
provide loan subsidies (e.g., loans which include principal 
forgiveness, negative interest rate loans) to benefit communities 
meeting the State's definition of ``disadvantaged'' or which the State 
expects to become ``disadvantaged'' as a result of the project. Loan 
subsidies in the form of reduced interest rate loans that are at or 
above zero percent do not fall under the 30 percent allowance described 
in paragraph (b)(2) of this section.
    (2) A State may take an amount equal to no more than 30 percent of 
the amount of a particular fiscal year's capitalization grant to 
provide loan subsidies to disadvantaged communities. If a State does 
not take the entire 30 percent allowance associated with a particular 
fiscal year's capitalization grant, it cannot reserve the authority to 
take the remaining balance of the allowance from future capitalization 
grants. In addition, a State must:
    (i) Indicate in the Intended Use Plan (IUP) the amount of the 
allowance it is taking for loan subsidies;
    (ii) Commit capitalization grant and required State match dollars 
taken for loan subsidies in accordance with the binding commitment 
requirements in Sec. 35.3550(e); and
    (iii) Commit any other dollars (e.g., principal and interest 
repayments, investment earnings) taken for loan subsidies to projects 
over the same time period during which binding commitments are made for 
the capitalization grant from which the allowance was taken.
    (3) A State may extend the term for a loan to a disadvantaged 
community, provided that a recipient completes loan repayment no later 
than 30 years after project completion and the term of the loan does 
not exceed the expected design life of the project.
    (c) Refinance or purchase of local debt obligations.--(1) General. 
A State may buy or refinance local debt obligations of municipal, 
intermunicipal, or interstate agencies where the debt obligation was 
incurred and the project was initiated after July 1, 1993. Projects 
must have met the eligibility requirements under section 1452 of the 
Act and this subpart to be eligible for refinancing. Privately-owned 
systems are not eligible for refinancing.
    (2) Multi-purpose debt. If the original debt for a project was in 
the form of a multi-purpose bond incurred for purposes in addition to 
eligible purposes under section 1452 of the Act and this subpart, a 
State may provide refinancing only for the eligible portion of the 
debt, not the entire debt.
    (3) Refinancing and State match. If a State has credited repayments 
of loans made under a pre-existing State loan program as part of its 
State match, the State cannot also refinance the projects under the 
DWSRF program. If the State has already counted certain projects toward 
its State match which it now wants to refinance, the State must provide 
replacement funds for the amounts previously credited as match.
    (d) Purchase insurance or guarantee for local debt obligations. A 
State may provide assistance by purchasing insurance or guaranteeing a 
local debt obligation to improve credit market access or to reduce 
interest rates. Assistance of this type is limited to local debt 
obligations that are undertaken to finance projects eligible for 
assistance under section 1452 of the Act and this subpart.
    (e) Revenue or security for Fund debt obligations (leveraging). A 
State may use Fund assets as a source of revenue or security for the 
payment of principal and interest on revenue or general obligation 
bonds issued by the State in order to increase the total amount of 
funds available for providing assistance. The net proceeds of the sale 
of the bonds must be deposited into the Fund and must be used for 
providing loans and other assistance to finance projects eligible under 
section 1452 of the Act and this subpart.


Sec. 35.3530  Limitations on uses of the Fund.

    (a) Earn interest. A State may earn interest on monies deposited 
into the Fund prior to disbursement of assistance (e.g., on reserve 
accounts used as security or guarantees). Monies deposited must not 
remain in the Fund primarily to earn interest. Amounts not required for 
current obligation or expenditure must be invested in interest bearing 
obligations.
    (b) Program administration. A State may not use monies deposited 
into the Fund to cover its program administration costs. In addition to 
using the funds available from the administration and technical 
assistance set-aside under Sec. 35.3535(b), a State may use the 
following methods to cover its program administration and other program 
costs.
    (1) A State may use the proceeds of bonds guaranteed by the Fund to 
absorb expenses incurred issuing the bonds. The net proceeds of the 
bonds must be deposited into the Fund.
    (2) A State may assess fees on an assistance recipient which are 
paid directly by the recipient and are not included as principal in a 
loan as allowed in paragraph (b)(3) of this section. These fees, which 
include interest earned on fees, must be deposited into the Fund or 
into an account outside of the Fund. If the fees are deposited into the 
Fund, they are subject to the authorized uses of the Fund. If the fees 
are deposited into an account outside of the Fund, they must be used 
for program administration, other purposes for which capitalization 
grants can be awarded under section 1452, State match under sections 
1452(e) and (g)(2) of the Act, or combined financial administration of 
the DWSRF program and CWSRF program Funds where the programs are 
administered by the same State agency.
    (3) A State may assess fees on an assistance recipient which are 
included as principal in a loan. These fees, which include interest 
earned on fees, must be deposited into the Fund or into an account 
outside of the Fund. If the fees are deposited into the Fund, they are 
subject to the authorized uses of the Fund. If the fees are deposited 
into an account outside of the Fund, they must be used for program 
administration or other purposes for which capitalization grants can be 
awarded under section 1452. Fees included as principal in a loan cannot 
be used for State match under sections 1452(e) and (g)(2) of the Act or 
combined financial administration of the DWSRF program and CWSRF 
program Funds. Additionally, fees included as principal in a loan:
    (i) Cannot be assessed on a disadvantaged community which receives 
a loan subsidy provided from the 30 percent allowance in 
Sec. 35.3525(b)(2);
    (ii) Cannot cause the effective rate of a loan (which includes both 
interest and fees) to exceed the market rate; and
    (iii) Cannot be assessed if the effective rate of a loan could 
reasonably be expected to cause a system to fail to meet the technical, 
financial, and managerial capability requirements under section 1452 of 
the Act.
    (c) Transfers. The Governor of a State, or a State official acting 
pursuant to authorization from the Governor, may transfer an amount 
equal to 33 percent of a fiscal year's DWSRF program capitalization 
grant to the CWSRF program or an equivalent amount from

[[Page 48304]]

the CWSRF program to the DWSRF program. The following conditions apply:
    (1) When a State initially decides to transfer funds:
    (i) The State's Attorney General, or someone designated by the 
Attorney General, must sign or concur in a certification for the DWSRF 
program and the CWSRF program that State law permits the State to 
transfer funds; and
    (ii) The Operating Agreements or other parts of the capitalization 
grant agreements for the DWSRF program and the CWSRF program must be 
amended to detail the method the State will use to transfer funds.
    (2) A State may not use the transfer provision to acquire State 
match for either program or use transferred funds to secure or repay 
State match bonds.
    (3) Funds may be transferred after one year has elapsed since a 
State established its Fund (i.e., one year after the State has received 
its first DWSRF program capitalization grant for projects), and may 
include an amount equal to the allowance associated with its fiscal 
year 1997 capitalization grant.
    (4) A State may reserve the authority to transfer funds in future 
years.
    (5) Funds may be transferred on a net basis between the DWSRF 
program and CWSRF program, provided that the 33 percent transfer 
allowance associated with DWSRF program capitalization grants received 
is not exceeded.
    (6) Funds may not be transferred or reserved after September 30, 
2001.
    (d) Cross-collateralization. A State may combine the Fund assets of 
the DWSRF program and CWSRF program as security for bond issues to 
enhance the lending capacity of one or both of the programs. The 
following conditions apply:
    (1) When a State initially decides to cross-collateralize:
    (i) The State's Attorney General, or someone designated by the 
Attorney General, must sign or concur in a certification for the DWSRF 
program and the CWSRF program that State law permits the State to 
cross-collateralize the Fund assets of the DWSRF program and CWSRF 
program; and
    (ii) The Operating Agreements or other parts of the capitalization 
grant agreements for the DWSRF program and the CWSRF program must be 
amended to detail the method the State will use to cross-collateralize.
    (2) The proceeds generated by the issuance of bonds must be 
allocated to the purposes of the DWSRF program and CWSRF program in the 
same proportion as the assets from the Funds that are used as security 
for the bonds. A State must demonstrate at the time of bond issuance 
that the proportionality requirements have been or will be met. If a 
default should occur, and the Fund assets from one program are used for 
debt service in the other program to cure the default, the security 
would no longer need to be proportional.
    (3) A State may not combine the Fund assets of the DWSRF program 
and the CWSRF program as security for bond issues to acquire State 
match for either program or use the assets of one program to secure 
match bonds for the other program.
    (4) The debt service reserves for the DWSRF program and the CWSRF 
program must be accounted for separately.
    (5) Loan repayments must be made to the respective program from 
which the loan was made.


Sec. 35.3535  Authorized set-aside activities.

    (a) General. (1) A State may use a portion of its capitalization 
grants for the set-aside categories described in paragraphs (b) through 
(e) of this section, provided that the amount of set-aside funding does 
not exceed the ceilings specified in this section.
    (2) A State may not use set-aside funds for those projects or 
project-related costs listed in Sec. 35.3520(b), (c), (e), and (f), 
with the following exceptions:
    (i) Project planning and design costs for small systems; and
    (ii) Costs for restructuring a system as part of a capacity 
development strategy.
    (b) Administration and technical assistance. A State may use up to 
4 percent of its allotment to cover the reasonable costs of 
administering the DWSRF program and to provide technical assistance to 
public water systems.
    (c) Small systems technical assistance. A State may use up to 2 
percent of its allotment to provide technical assistance to small 
systems. A State may use these funds for activities such as supporting 
a State technical assistance team or contracting with outside 
organizations or other parties to provide technical assistance to small 
systems.
    (d) State program management. A State may use up to 10 percent of 
its allotment for State program management activities.
    (1) This set-aside may only be used for the following activities:
    (i) To administer the State PWSS program;
    (ii) To administer or provide technical assistance through source 
water protection programs (including a Class V Underground Injection 
Control Program), except for enforcement actions;
    (iii) To develop and implement a capacity development strategy; and
    (iv) To develop and implement an operator certification program.
    (2) Match requirement. A State must provide a dollar for dollar 
match for expenditures made under this set-aside.
    (i) The match must be provided at the time of the capitalization 
grant award or in the same year that funds for this set-aside are 
expected to be expended in accordance with a workplan approved by EPA.
    (ii) A State is authorized to use the amount of State funds it 
expended on its PWSS program in fiscal year 1993 (including PWSS match) 
as a credit toward meeting its match requirement. The value of this 
credit can be up to, but not greater than, 50 percent of the amount of 
match that is required. After determining the value of the credit that 
it is eligible to receive, a State must provide the additional funds 
necessary to meet the remainder of the match requirement. The source of 
these additional funds can be State funds (excluding PWSS match) or 
documented in-kind services.
    (e) Local assistance and other State programs. A State may use up 
to 15 percent of its capitalization grant to assist in the development 
and implementation of local drinking water protection initiatives and 
other State programs. No more than 10 percent of the capitalization 
grant amount can be used for any one authorized activity.
    (1) This set-aside may only be used for the following activities:
    (i) A State may provide assistance only in the form of loans to 
community water systems and non-profit noncommunity water systems to 
acquire land or conservation easements from willing sellers or 
grantors. A system must demonstrate how the purchase of land or 
easements will protect the source water of the system from 
contamination and ensure compliance with national primary drinking 
water regulations. A State must develop a priority setting process for 
determining what parcels of land or easements to purchase or use an 
established priority setting process that meets the same goals. A State 
must seek public review and comment on its priority setting process and 
must identify the systems that received loans and include a description 
of the specific parcels of land or easements purchased in the Biennial 
Report.
    (ii) A State may provide assistance only in the form of loans to 
community water systems to assist in implementing voluntary, incentive-
based source water protection measures in areas delineated under a 
source water assessment

[[Page 48305]]

program under section 1453 of the Act and for source water petitions 
under section 1454 of the Act. A State must develop a list of systems 
that may receive loans, giving priority to activities that facilitate 
compliance with national primary drinking water regulations applicable 
to the systems or otherwise significantly further the health protection 
objectives of the Act. A State must seek public review and comment on 
its priority setting process and its list of systems that may receive 
loans.
    (iii) A State may make expenditures to establish and implement 
wellhead protection programs under section 1428 of the Act.
    (iv) A State may provide assistance, including technical and 
financial assistance, to public water systems as part of a capacity 
development strategy under section 1420(c) of the Act.
    (v) A State may make expenditures from its fiscal year 1997 
capitalization grant to delineate and assess source water protection 
areas for public water systems under section 1453 of the Act. 
Assessments include the identification of potential sources of 
contamination within the delineated areas. These assessment activities 
are limited to the identification of contaminants regulated under the 
Act or unregulated contaminants that a State determines may pose a 
threat to public health. A State must obligate funds within 4 years of 
receiving its fiscal year 1997 capitalization grant.
    (2) A State may make loans under this set-aside only if an 
assistance recipient begins annual repayment of principal and interest 
no later than one year after completion of the activity and completes 
loan repayment no later than 20 years after completion of the activity. 
A State must deposit repayments into the Fund or into a separate 
account dedicated for this set-aside. The separate account is subject 
to the same management oversight requirements as the Fund. Amounts 
deposited into the Fund are subject to the authorized uses of the Fund.


Sec. 35.3540  Requirements for funding set-aside activities.

    (a) General. If a State makes a grant or enters into a cooperative 
agreement with an assistance recipient to conduct set-aside activities, 
the recipient must comply with general grant regulations at 40 CFR part 
30 or part 31, as appropriate.
    (b) Set-aside accounts. A State must maintain separate and 
identifiable accounts for the portion of its capitalization grant to be 
used for set-aside activities.
    (c) Workplans.--(1) General. A State must submit detailed annual or 
multi-year workplans to EPA for approval describing how set-aside funds 
will be expended. For the administration and technical assistance set-
aside under Sec. 35.3535(b), the State is only required to submit a 
workplan describing how it will expend funds needed to provide 
technical assistance to public water systems. In order to ensure that 
funds are expended efficiently, multi-year workplan terms negotiated 
with EPA must be less than four years, unless a longer term is approved 
by EPA.
    (2) Submitting workplans. A State must submit workplans in 
accordance with a schedule negotiated with EPA. If a schedule has not 
been negotiated, the State must submit workplans no later than 90 days 
after the capitalization grant award. If a State does not meet the 
deadline for submitting its workplans, the set-aside funds that were 
required to be described in the workplans must be transferred to the 
Fund to be used for projects.
    (3) Content. Workplans must at a minimum include:
    (i) The annual funding amount in dollars and as a percentage of the 
State allotment or capitalization grant;
    (ii) The projected number of work years needed for implementing 
each set-aside activity;
    (iii) The goals and objectives, outputs, and deliverables for each 
set-aside activity;
    (iv) A schedule for completing activities under each set-aside 
activity;
    (v) Identification and responsibilities of the agencies involved in 
implementing each set-aside activity, including activities proposed to 
be conducted by a third party; and
    (vi) A description of the evaluation process to assess the success 
of work funded under each set-aside activity.
    (4) Amending workplans. If a State changes the scope of work from 
what was originally described in its workplans, it must amend the 
workplans and submit them to EPA for approval.
    (d) Reserving set-aside funds. (1) A State may reserve set-aside 
funds from a capitalization grant and expend them over a period of 
time, provided that the State identifies the amount of funds reserved 
in the IUP and describes the use of the funds in workplans approved by 
EPA. For the administration and technical assistance set-aside under 
Sec. 35.3535(b), the State is only required to submit a workplan to 
reserve funds needed to provide technical assistance to public water 
systems.
    (2) With the exception of the local assistance and other State 
programs set-aside under Sec. 35.3535(e), a State may reserve the 
authority to take from future capitalization grants those set-aside 
funds that it has not included in workplans. The State must identify in 
the IUP the amount of authority reserved from a capitalization grant 
for future use.
    (e) Fund and set-aside account transfers. (1) A State may transfer 
funds among set-aside categories described in Sec. 35.3535(b) through 
(e) and among activities within these categories, provided that set-
aside ceilings are not exceeded.
    (2) A State may transfer funds between the Fund and set-asides, 
provided that set-aside ceilings are not exceeded. Set-aside funds may 
be transferred at any time to the Fund. If a State has taken payment 
for the set-aside funds to be transferred to the Fund, it must make 
binding commitments for these funds within one year of the transfer. 
Monies intended for the Fund may be transferred to set-asides only if 
the State has not yet taken a payment that includes those funds to be 
transferred in accordance with the payment schedule negotiated with 
EPA.
    (3) The capitalization grant agreement must be amended prior to any 
transfer among the set-aside categories or any transfer between the 
Fund and set-asides.


Sec. 35.3545  Capitalization grant agreement.

    (a) General. A State must submit a capitalization grant application 
to EPA in order to receive a capitalization grant award. Approval of an 
application results in EPA and the State entering into a capitalization 
grant agreement which is the principal instrument by which the State 
commits to manage the DWSRF program in accordance with the requirements 
of section 1452 of the Act and this subpart.
    (b) Content. In addition to the items listed in paragraphs (c) 
through (f) of this section, the capitalization grant agreement must 
contain or incorporate by reference the Application for Federal 
Assistance (EPA Form 424) and other related forms, IUP, negotiated 
payment schedule, State environmental review process (SERP), 
demonstrations of the specific capitalization grant agreement 
requirements listed in Sec. 35.3550, and other documentation required 
by the Regional Administrator (RA). The capitalization grant agreement 
must also define the types of performance measures, reporting 
requirements, and oversight responsibilities that will be required to 
determine compliance with section 1452 of the Act.
    (c) Operating agreement. At the option of a State, the framework 
and

[[Page 48306]]

procedures of the DWSRF program that are not expected to change 
annually may be described in an Operating Agreement. The Operating 
Agreement may be amended if the State negotiates the changes with EPA.
    (d) Attorney General certification. With the capitalization grant 
application, the State's Attorney General, or someone designated by the 
Attorney General, must sign or concur in a certification that:
    (1) The authority establishing the DWSRF program and the powers it 
confers are consistent with State law;
    (2) The State may legally bind itself to the proposed terms of the 
capitalization grant agreement; and
    (3) An agency of the State is authorized to enter into 
capitalization grant agreements with EPA, accept capitalization grant 
awards made under section 1452 of the Act, and otherwise manage the 
Fund in accordance with the requirements and objectives of the Act and 
this subpart.
    (e) Roles and responsibilities of agencies. If more than one State 
agency participates in the implementation of the DWSRF program, the 
State must describe the roles and responsibilities of each agency in 
the capitalization grant application and include a Memorandum of 
Understanding or interagency agreement describing these roles and 
responsibilities.
    (f) Process for evaluating capability and compliance. A State must 
include in the capitalization grant application a description of the 
following:
    (1) The process it will use to assess the technical, financial, and 
managerial capability of all systems requesting assistance to ensure 
that the systems are in compliance with the requirements of the Act.
    (2) If a State provides assistance to systems that lack technical, 
financial, and managerial capability, the process it will use to ensure 
that the systems undertake feasible and appropriate changes in 
operations to comply with the requirements of the Act over the long-
term.
    (3) If a State provides assistance to systems in significant 
noncompliance with any national primary drinking water regulation or 
variance, the process it will use to ensure that the systems return to 
compliance.


Sec. 35.3550  Specific capitalization grant agreement requirements.

    (a) General. A State must agree to comply with this subpart, the 
general grant regulations at 40 CFR part 31, and specific conditions of 
the grant. A State must also agree to the following requirements and, 
in some cases, provide documentation as part of the capitalization 
grant application.
    (b) Comply with State statutes and regulations. A State must agree 
to comply with all State statutes and regulations that are applicable 
to DWSRF program funds including capitalization grant funds, State 
match, interest earnings, net bond proceeds, repayments, and funds used 
for set-aside activities.
    (c) Demonstrate technical capability. A State must agree to provide 
documentation demonstrating that it has adequate personnel and 
resources to establish and manage the DWSRF program.
    (d) Accept payments. A State must agree to accept capitalization 
grant payments in accordance with a payment schedule negotiated between 
EPA and the State.
    (e) Make binding commitments. A State must agree to enter into 
binding commitments with assistance recipients to provide assistance 
from the Fund.
    (1) Binding commitments must be made in an amount equal to the 
amount of each capitalization grant payment and accompanying State 
match that is deposited into the Fund and must be made within one year 
after the receipt of each grant payment.
    (2) A State may make binding commitments for more than the required 
amount and credit the excess towards the binding commitment 
requirements of subsequent grant payments.
    (3) If a State is concerned about its ability to comply with the 
binding commitment requirement, it must notify the RA and propose a 
revised payment schedule for future grant payments.
    (f) Deposit of funds. A State must agree to promptly deposit DWSRF 
program funds into appropriate accounts.
    (1) A State must agree to deposit the portion of the capitalization 
grant to be used for projects into the Fund.
    (2) A State must agree to maintain separate and identifiable 
accounts for the portion of the capitalization grant to be used for 
set-aside activities.
    (3) A State must agree to deposit net bond proceeds, interest 
earnings, and repayments into the Fund.
    (4) A State must agree to deposit any fees, which include interest 
earned on fees, into the Fund or into separate and identifiable 
accounts.
    (g) Provide State match. A State must agree to deposit into the 
Fund an amount from State monies that equals at least 20 percent of 
each capitalization grant payment.
    (1) A State must identify the source of State match in the 
capitalization grant application.
    (2) A State must deposit the match into the Fund on or before the 
date that a State receives each payment for the capitalization grant, 
except when a State chooses to use a letter of credit (LOC) mechanism 
or similar financial arrangement for the State match. Under this 
mechanism, payments to this LOC account must be made proportionally on 
the same schedule as the payments for the capitalization grant. Cash 
from this State match LOC account must be drawn into the Fund as cash 
is drawn into the Fund through the Automated Clearing House (ACH).
    (3) A State may issue general obligation or revenue bonds to derive 
the State match. The net proceeds from the bonds issued by a State to 
derive the match must be deposited into the Fund and the bonds may only 
be retired using the interest portion of loan repayments and interest 
earnings of the Fund. Loan principal must not be used to retire State 
match bonds.
    (4) If the State deposited State monies in a dedicated revolving 
fund after July 1, 1993, and prior to receiving a capitalization grant, 
the State may credit these monies toward the match requirement if:
    (i) The monies were deposited in a separate revolving fund that 
subsequently became the Fund after receiving a capitalization grant and 
they were expended in accordance with section 1452 of the Act;
    (ii) The monies were deposited in a separate revolving fund that 
has not received a capitalization grant, they were expended in 
accordance with section 1452 of the Act, and an amount equal to all 
repayments of principal and payments of interest from loans will be 
deposited into the Fund; or
    (iii) The monies were deposited in a separate revolving fund and 
used as a reserve for a leveraged program consistent with section 1452 
of the Act and an amount equal to the reserve is transferred to the 
Fund as the reserve's function is satisfied.
    (5) If a State provides a match in excess of the required amount, 
the excess balance may be credited towards match requirements 
associated with subsequent capitalization grants.
    (h) Provide match for State program management set-aside. A State 
must agree to provide a dollar for dollar match for expenditures made 
under the State program management set-aside in accordance with 
Sec. 35.3535(d)(2). This match is separate from the 20 percent State 
match requirement for the capitalization grant in paragraph (g) of this 
section and must be identified as an eligible credit, deposited into 
set-aside

[[Page 48307]]

accounts, or documented as in-kind services.
    (i) Use generally accepted accounting principles. A State must 
agree to ensure that the State and public water systems receiving 
assistance will use accounting, audit, and fiscal procedures conforming 
to Generally Accepted Accounting Principles (GAAP) as promulgated by 
the Governmental Accounting Standards Board or, in the case of 
privately-owned systems, the Financial Accounting Standards Board. The 
accounting system used for the DWSRF program must allow for proper 
measurement of:
    (1) Revenues earned and other receipts, including but not limited 
to, loan repayments, capitalization grants, interest earnings, State 
match deposits, and net bond proceeds;
    (2) Expenses incurred and other disbursements, including but not 
limited to, loan disbursements, repayment of bonds, and other 
expenditures allowed under section 1452 of the Act; and
    (3) Assets, liabilities, capital contributions, and retained 
earnings.
    (j) Conduct audits. In accordance with Sec. 35.3570(b), a State 
must agree to comply with the provisions of the Single Audit Act 
Amendments of 1996. A State may voluntarily agree to conduct annual 
independent audits.
    (k) Dedicated repayment source. A State must agree to adopt 
policies and procedures to assure that assistance recipients have a 
dedicated source of revenue for repayment of loans, or in the case of 
privately-owned systems, assure that recipients demonstrate that there 
is adequate security to assure repayment of loans.
    (l) Efficient expenditure. A State must agree to commit and expend 
all funds as efficiently as possible and in an expeditious and timely 
manner.
    (m) Use funds in accordance with IUP. A State must agree to use all 
funds in accordance with an IUP that was prepared after providing for 
public review and comment.
    (n) Biennial report. A State must agree to complete and submit a 
Biennial Report that describes how it has met the goals and objectives 
of the previous two fiscal years as stated in the IUPs and 
capitalization grant agreements. The State must submit this report to 
the RA according to the schedule established in the capitalization 
grant agreement.
    (o) Comply with cross-cutters. A State must agree to comply with 
all applicable Federal cross-cutting authorities.
    (p) Comply with provisions to avoid withholdings. A State must 
agree to demonstrate how it is complying with the requirements of 
capacity development authority, capacity development strategy, and 
operator certification program provisions in order to avoid 
withholdings of funds under Sec. 35.3515(b)(1)(i) through (b)(1)(iii).


Sec. 35.3555  Intended Use Plan (IUP).

    (a) General. A State must prepare an annual IUP which describes how 
it intends to use DWSRF program funds to support the overall goals of 
the DWSRF program and contains the information outlined in paragraph 
(c) of this section. In those years in which a State submits a 
capitalization grant application, EPA must receive an IUP prior to the 
award of the capitalization grant. A State must prepare an annual IUP 
as long as the Fund or set-aside accounts remain in operation. The IUP 
must conform to the fiscal year adopted by the State for the DWSRF 
program (e.g., the State's fiscal year or the Federal fiscal year).
    (b) Public review requirements. A State must seek meaningful public 
review and comment during the development of the IUP. A State must 
include a description of the public review process and an explanation 
of how it responded to major comments and concerns. If a State prepares 
separate IUPs (one for Fund monies and one for set-aside monies), the 
State must seek public review and comment during the development of 
each IUP.
    (c) Content. Information in the IUP must be provided in a format 
and manner that is consistent with the needs of the RA.
    (1) Priority system. The IUP must include a priority system for 
ranking individual projects for funding that provides sufficient detail 
for the public and EPA to readily understand the criteria used for 
ranking. The priority system must provide, to the maximum extent 
practicable, that priority for the use of funds will be given to 
projects that: address the most serious risk to human health; are 
necessary to ensure compliance with the requirements of the Act 
(including requirements for filtration); and assist systems most in 
need, on a per household basis, according to State affordability 
criteria. A State that does not adhere to the three criteria must 
demonstrate why it is unable to do so.
    (2) Priority lists of projects. All projects, with the exception of 
projects funded on an emergency basis, must be ranked using a State's 
priority system and go through a public review process prior to 
receiving assistance.
    (i) The IUP must contain a fundable list of projects that are 
expected to receive assistance from available funds designated for use 
in the current IUP and a comprehensive list of projects that are 
expected to receive assistance in the future. The fundable list of 
projects must include: the name of the public water system; the 
priority assigned to the project; a description of the project; the 
expected terms of financial assistance based on the best information 
available at the time the IUP is developed; and the population of the 
system's service area at the time of the loan application. The 
comprehensive list must include, at a minimum, the priority assigned to 
each project and, to the extent known, the expected funding schedule 
for each project. A State may combine the fundable and comprehensive 
lists into one list, provided that projects which are expected to 
receive assistance from available funds designated for use in the 
current IUP are identified.
    (ii) The IUP may include procedures which would allow a State to 
bypass projects on the fundable list. The procedures must clearly 
identify the conditions which would allow a project to be bypassed and 
the method for identifying which projects would receive funding. If a 
bypass occurs, a State must fund the highest ranked project on the 
comprehensive list that is ready to proceed. If a State elects to 
bypass a project for reasons other than readiness to proceed, the State 
must explain why the project was bypassed in the Biennial Report and 
during the annual review. To the maximum extent practicable, a State 
must work with bypassed projects to ensure that they will be prepared 
to receive funding in future years.
    (iii) The IUP may allow for the funding of projects which require 
immediate attention to protect public health on an emergency basis, 
provided that a State defines what conditions constitute an emergency 
and identifies the projects in the Biennial Report and during the 
annual review.
    (iv) The IUP must demonstrate how a State will meet the requirement 
of providing loan assistance to small systems as described in 
Sec. 35.3525(a)(5). A State that is unable to comply with this 
requirement must describe the steps it is taking to ensure that a 
sufficient number of projects are identified to meet this requirement 
in future years.
    (3) Distribution of funds. The IUP must describe the criteria and 
methods that a State will use to distribute all funds including:
    (i) The process and rationale for distribution of funds between the 
Fund and set-aside accounts;
    (ii) The process for selection of systems to receive assistance;

[[Page 48308]]

    (iii) The rationale for providing different types of assistance and 
terms, including the method used to determine the market rate and the 
interest rate;
    (iv) The types, rates, and uses of fees assessed on assistance 
recipients; and
    (v) A description of the financial planning process undertaken for 
the Fund and the impact of funding decisions on the long-term financial 
health of the Fund.
    (4) Financial status. The IUP must describe the sources and uses of 
DWSRF program funds including: the total dollar amount in the Fund; the 
total dollar amount available for loans, including loans to small 
systems; the amount of loan subsidies that may be made available to 
disadvantaged communities from the 30 percent allowance in 
Sec. 35.3525(b)(2); the total dollar amount in set-aside accounts, 
including the amount of funds or authority reserved; and the total 
dollar amount in fee accounts.
    (5) Short- and long-term goals. The IUP must describe the short-
term and long-term goals it has developed to support the overall goals 
of the DWSRF program of ensuring public health protection, complying 
with the Act, ensuring affordable drinking water, and maintaining the 
long-term financial health of the Fund.
    (6) Set-aside activities. (i) The IUP must identify the amount of 
funds a State is electing to use for set-aside activities. A State must 
also describe how it intends to use these funds, provide a general 
schedule for their use, and describe the expected accomplishments that 
will result from their use.
    (ii) For loans made in accordance with the local assistance and 
other State programs set-aside under Sec. 35.3535(e)(1)(i) and 
(e)(1)(ii), the IUP must, at a minimum, describe the process by which 
recipients will be selected and how funds will be distributed among 
them.
    (7) Disadvantaged community assistance. The IUP must describe how a 
State's disadvantaged community program will operate including:
    (i) The State's definition of what constitutes a disadvantaged 
community;
    (ii) A description of affordability criteria used to determine the 
amount of disadvantaged assistance;
    (iii) The amount and type of loan subsidies that may be made 
available to disadvantaged communities from the 30 percent allowance in 
Sec. 35.3525(b)(2); and
    (iv) To the maximum extent practicable, an identification of 
projects that will receive disadvantaged assistance and the respective 
amounts.
    (8) Transfer process. If a State decides to transfer funds between 
the DWSRF program and CWSRF program, the IUPs for the DWSRF program and 
the CWSRF program must describe the process including:
    (i) The total amount and type of funds being transferred during the 
period covered by the IUP;
    (ii) The total amount of authority being reserved for future 
transfer, including the authority reserved from previous years; and
    (iii) The impact of the transfer on the amount of funds available 
to finance projects and set-asides and the long-term impact on the 
Fund.
    (9) Cross-collateralization process. If a State decides to cross-
collateralize Fund assets of the DWSRF program and CWSRF program, the 
IUPs for the DWSRF program and the CWSRF program must describe the 
process including:
    (i) The type of monies which will be used as security;
    (ii) How monies will be used in the event of a default; and
    (iii) Whether or not monies used for a default in the other program 
will be repaid, and if they will not be repaid, what will be the 
cumulative impact on the Funds.
    (d) Amending the IUP. The priority lists of projects may be amended 
during the year under provisions established in the IUP as long as 
additions or other substantive changes to the lists, except projects 
funded on an emergency basis, go through a public review process. A 
State may change the use of funds from what was originally described in 
the IUP as long as substantive changes go through a public review 
process.


Sec. 35.3560  General payment and cash draw rules.

    (a) Payment schedule. A State will receive each capitalization 
grant payment in the form of an increase to the ceiling of funds 
available through the ACH, made in accordance with a payment schedule 
negotiated between EPA and the State. A payment schedule that is based 
on a State's projection of binding commitments and use of set-aside 
funds as stated in the IUP must be included in the capitalization grant 
agreement. Changes to the payment schedule must be made through an 
amendment to the grant agreement.
    (b) Timing of payments. All payments to a State will be made by the 
earlier of 8 quarters after the capitalization grant is awarded or 12 
quarters after funds are allotted to a State.
    (c) Funds available for cash draw. Cash draws will be available 
only up to the amount of payments that have been made to a State.
    (d) Estimated cash draw schedule. On a schedule negotiated with 
EPA, a State must provide EPA with a quarterly schedule of estimated 
cash draws for the Federal fiscal year. The State must notify EPA when 
significant changes from the estimated cash draw schedule are 
anticipated. This schedule must be developed to conform with the 
procedures applicable to cash draws and must have sufficient detail to 
allow EPA and the State to jointly develop and maintain a forecast of 
cash draws.
    (e) Cash draw for set-asides. A State may draw cash through the ACH 
for the full amount of costs incurred for set-aside expenditures based 
on EPA approved workplans. A State may draw cash in advance to ensure 
funds are available to meet State payroll expenses. However, cash 
should be drawn no sooner than necessary to meet immediate payroll 
disbursement needs.
    (f) Cash draw for Fund. A State may draw cash through the ACH for 
the proportionate Federal share of eligible incurred project costs. A 
State need not have disbursed funds for incurred project costs prior to 
drawing cash. A State may not draw cash for a particular project until 
the State has executed a loan agreement for that project.
    (g) Calculation of proportionate Federal share--(1) General. The 
proportionate Federal share is equal to the Federal monies intended for 
the Fund (capitalization grant minus set-asides) divided by the total 
amount of monies intended for the Fund (capitalization grant minus set-
asides plus required State match). A State may calculate the 
proportionate Federal share on a rolling average basis or on a grant by 
grant basis.
    (2) State overmatch. (i) The proportionate Federal share does not 
change if a State is providing funds in excess of the required State 
match.
    (ii) Federal monies may be drawn at a rate that is greater than 
that determined by the proportionate Federal share calculation when a 
State is given credit toward its match amount as a result of funding 
projects in prior years (but after July 1, 1993), or for crediting 
excess match in the Fund in prior years and disbursing these amounts 
prior to drawing cash. If the entire amount of a State's required match 
has been disbursed in advance, the proportionate Federal share of cash 
draws would be 100 percent.

[[Page 48309]]

Sec. 35.3565  Specific cash draw rules for authorized types of 
assistance from the Fund.

    A State may draw cash for the authorized types of assistance from 
the Fund described in Sec. 35.3525 according to the following rules:
    (a) Loans--(1) Eligible project costs. A State may draw cash based 
on the proportionate Federal share of incurred project costs. In the 
case of incurred planning and design and associated pre-project costs, 
cash may be drawn immediately upon execution of the loan agreement.
    (2) Eligible project reimbursement costs. A State may draw cash to 
reimburse assistance recipients for eligible project costs at a rate no 
greater than equal amounts over the maximum number of quarters that 
capitalization grant payments are made. A State may immediately draw 
cash for up to 5 percent of each fiscal year's capitalization grant or 
2 million dollars, whichever is greater, to reimburse project costs.
    (b) Refinance or purchase of local debt obligations--(1) Completed 
projects. A State may draw cash up to the portion of the capitalization 
grant committed to the refinancing or purchase of local debt 
obligations of municipal, intermunicipal, or interstate agencies at a 
rate no greater than equal amounts over the maximum number of quarters 
that capitalization grant payments are made. A State may immediately 
draw cash for up to 5 percent of each fiscal year's capitalization 
grant or 2 million dollars, whichever is greater, to refinance or 
purchase local debt.
    (2) Portions of projects not completed. A State may draw cash based 
on the proportionate Federal share of incurred project costs according 
to the rule for loans in paragraph (a)(1) of this section.
    (3) Purchase of incremental disbursement bonds from local 
governments. A State may draw cash based on a schedule that coincides 
with the rate at which costs are expected to be incurred for the 
project.
    (c) Purchase insurance for local debt obligations. A State may draw 
cash for the proportionate Federal share of insurance premiums as they 
are due.
    (d) Guarantee for local debt obligations--(1) In the event of 
default. In the event of imminent default in debt service payments on a 
guaranteed local debt, a State may draw cash immediately up to the 
total amount of the capitalization grant that is dedicated for the 
guarantee. If a balance remains after the default is satisfied, the 
State must negotiate a revised cash draw schedule for the remaining 
amount dedicated for the guarantee.
    (2) In the absence of default. A State may draw cash up to the 
amount of the capitalization grant dedicated for the guarantee based on 
actual incurred project costs. The amount of the cash draw would be 
based on the proportionate Federal share of incurred project costs 
multiplied by the ratio of the guarantee reserve to the amount 
guaranteed.
    (e) Revenue or security for Fund debt obligations (leveraging)--(1) 
In the event of default. In the event of imminent default in debt 
service payments on a secured debt, a State may draw cash immediately 
up to the total amount of the capitalization grant that is dedicated 
for the security. If a balance remains after the default is satisfied, 
the State must negotiate a revised schedule for the remaining amount 
dedicated for the security.
    (2) In the absence of default. A State may draw cash up to the 
amount of the capitalization grant dedicated for the security using 
either of the following methods:
    (i) All projects method. A State may draw cash based on the 
incurred project costs multiplied by the ratio of the Federal portion 
of the reserve to the total reserve multiplied by the ratio of the 
total reserve to the net bond proceeds.
    (ii) Group of projects method. A State may identify a group of 
projects whose cost is approximately equal to the total of that portion 
of the capitalization grant and the State match dedicated as a 
security. The State may then draw cash based on the incurred costs of 
the selected projects only, multiplied by the ratio of the Federal 
portion of the security to the entire security.
    (3) Aggressive leveraging. Where the cash draw rules in paragraphs 
(e)(1) and (e)(2) of this section would significantly frustrate a 
State's leveraged program, EPA may permit an exception to these cash 
draw rules and provide for a more accelerated cash draw. A State must 
demonstrate that:
    (i) There are eligible projects ready to proceed in the immediate 
future with enough costs to justify the amount of the secured bond 
issue;
    (ii) The absence of cash on an accelerated basis will substantially 
delay these projects;
    (iii) The Fund will provide substantially more assistance if 
accelerated cash draws are allowed; and
    (iv) The long-term viability of the State program to meet drinking 
water needs will be protected.
    (f) Loans to privately-owned systems. In cases where State monies 
cannot be used to provide loans to privately-owned systems, a State may 
draw 100 percent Federal monies for costs incurred by privately-owned 
systems. When Federal monies are drawn for incurred costs, the State 
must deposit or have previously deposited into the Fund the required 
match associated with the amount of cash drawn. Every 18 months, the 
State must submit documentation showing that it has met its 
proportionate Federal share within the last 6 months. If a State is 
unable to document that it has met its proportionate Federal share, 
State match deposited into the Fund must be expended before Federal 
monies are drawn for costs incurred by publicly-owned systems until the 
State meets its proportionate Federal share.


Sec. 35.3570  Reports and audits.

    (a) Biennial report--(1) General. A State must submit a Biennial 
Report to the RA describing how it has met the goals and objectives of 
the previous two fiscal years as stated in the IUPs and capitalization 
grant agreements, including the most recent audit of the Fund and the 
entire State allotment. The State must submit this report to the RA 
according to the schedule established in the capitalization grant 
agreement. Information provided in the Biennial Report on other EPA 
programs eligible for assistance from the DWSRF program may not replace 
the reporting requirements for those other programs.
    (2) Financial report. As part of the Biennial Report, a State must 
present the financial status of the DWSRF program, including the total 
dollar amount in fee accounts. This report must, at a minimum, include 
the financial statements and footnotes required under GAAP to present 
fairly the financial condition and results of operations.
    (3) Matters to establish in the biennial report. A State must 
establish in the Biennial Report that it has complied with section 1452 
of the Act and this subpart. In particular, the Biennial Report must 
demonstrate that a State has:
    (i) Managed the DWSRF program in a fiscally prudent manner and 
adopted policies and processes which promote the long-term financial 
health of the Fund;
    (ii) Deposited its match (cash or State LOC) into the Fund in 
accordance with the requirements of Sec. 35.3550(g);
    (iii) Made binding commitments with assistance recipients to 
provide assistance from the Fund consistent with the requirements of 
Sec. 35.3550(e);
    (iv) Funded only the highest priority projects listed in the IUP 
and

[[Page 48310]]

documented why priority projects were bypassed in accordance with 
Sec. 35.3555(c)(2);
    (v) Provided assistance only to eligible public water systems and 
for eligible projects and project-related costs under Sec. 35.3520;
    (vi) Provided assistance only for eligible set-aside activities 
under Sec. 35.3535 and conducted activities consistent with workplans 
and other requirements of Sec. 35.3535 and Sec. 35.3540;
    (vii) Provided loan assistance to small systems consistent with the 
requirements of Sec. 35.3525(a)(5) and Sec. 35.3555(c)(2)(iv);
    (viii) Provided assistance to disadvantaged communities consistent 
with the requirements of Sec. 35.3525(b) and Sec. 35.3555(c)(7);
    (ix) Used fees for eligible purposes under Sec. 35.3530(b)(2) and 
(b)(3) and assessed fees included as principal in a loan in accordance 
with the limitations in Sec. 35.3530(b)(3)(i) through (b)(3)(iii);
    (x) Adopted and implemented procedures consistent with the 
requirements of Sec. 35.3530(c) and Sec. 35.3555(c)(8) if funds were 
transferred between the DWSRF program and CWSRF program;
    (xi) Adopted and implemented procedures consistent with the 
requirements of Sec. 35.3530(d) and Sec. 35.3555(c)(9) if Fund assets 
of the DWSRF program and CWSRF program were cross-collateralized;
    (xii) Reviewed all DWSRF program funded projects and activities for 
compliance with Federal cross-cutting authorities that apply to the 
State as a grant recipient and those which apply to assistance 
recipients in accordance with Sec. 35.3575;
    (xiii) Reviewed all DWSRF program funded projects and activities in 
accordance with approved State environmental review procedures under 
Sec. 35.3580; and
    (xiv) Complied with general grant regulations at 40 CFR part 31 and 
specific conditions of the grant.
    (4) Joint report. A State which jointly administers the DWSRF 
program and the CWSRF program may submit a report that addresses both 
programs. However, programmatic and financial information for each 
program must be identified separately.
    (b) Audit. (1) A State must comply with the provisions of the 
Single Audit Act Amendments of 1996, 31 U.S.C. 7501-7, and Office of 
Management and Budget's Circular A-133 and Compliance Supplement.
    (2) A State may voluntarily agree to conduct annual independent 
audits which provide an auditor's opinion on the DWSRF program 
financial statements, reports on internal controls, and reports on 
compliance with section 1452 of the Act, applicable regulations, and 
general grant requirements. The agreement to conduct voluntary 
independent audits should be documented in the Operating Agreement or 
in another part of the capitalization grant agreement.
    (3) Those States that do not conduct independent audits will be 
subject to periodic audits by the EPA Office of Inspector General.
    (c) Annual review--(1) Purpose. The purpose of the annual review is 
to assess the success of the State's performance of activities 
identified in the IUP, Biennial Report (in years when it is submitted), 
and Operating Agreement (if used) and to determine compliance with the 
capitalization grant agreement, requirements of section 1452 of the 
Act, and this subpart. The RA will complete the annual review according 
to the schedule established in the capitalization grant agreement.
    (2) Records access. After reasonable notice by the RA, the State or 
assistance recipient must make available such records as the RA 
reasonably considers pertinent to review and determine State compliance 
with the capitalization grant agreement and requirements of section 
1452 of the Act and this subpart. The RA may conduct on-site visits as 
deemed necessary to perform the annual review.
    (d) Information management system--(1) Purpose. The purpose of the 
information management system is to assess the DWSRF programs, to 
monitor State progress in years in which Biennial Reports are not 
submitted, and to assist in conducting annual reviews.
    (2) Reporting. A State must annually submit information to EPA on 
the amount of funds available and assistance provided by the DWSRF 
program.


Sec. 35.3575  Application of Federal cross-cutting authorities (cross-
cutters).

    (a) General. A number of Federal laws, executive orders, and 
government-wide policies apply by their own terms to projects and 
activities receiving Federal financial assistance, regardless of 
whether the statute authorizing the assistance makes them applicable. A 
few cross-cutters apply by their own terms only to the State as the 
grant recipient because the authorities explicitly limit their 
application to grant recipients.
    (b) Application of cross-cutter requirements. Except as provided in 
paragraphs (c) and (d) of this section and in Sec. 35.3580, cross-
cutter requirements apply in the following manner:
    (1) All projects for which a State provides assistance in amounts 
up to the amount of the capitalization grant deposited into the Fund 
must comply with the requirements of the cross-cutters. Activities for 
which a State provides assistance from capitalization grant funds 
deposited into set-aside accounts must comply with the requirements of 
the cross-cutters, to the extent that the requirements of the cross-
cutters are applicable.
    (2) Projects and activities for which a State provides assistance 
in amounts that are greater than the amount of the capitalization grant 
deposited into the Fund or set-aside accounts are not subject to the 
requirements of the cross-cutters.
    (3) A State that elects to impose the requirements of the cross-
cutters on projects and activities for which it provides assistance in 
amounts that are greater than the amount of the capitalization grant 
deposited into the Fund or set-aside accounts may credit this excess to 
meet future cross-cutter requirements on assistance provided from the 
respective accounts.
    (c) Federal anti-discrimination law requirements. All programs, 
projects, and activities for which a State provides assistance are 
subject to the following Federal anti-discrimination laws: Civil Rights 
Act of 1964, as amended, 42 U.S.C. 2000d et seq.; section 504 of the 
Rehabilitation Act of 1973, as amended, 29 U.S.C. 794; and the Age 
Discrimination Act of 1975, as amended, 42 U.S.C. 6102.
    (d) Minority and Women's Business Enterprise (MBE/WBE) procurement 
requirements. A State must negotiate a fair share goal with the RA for 
the participation of MBE/WBEs. The fair share goal must be based on the 
availability of MBE/WBEs in the relevant market area to do the work 
under the DWSRF program. Each capitalization grant agreement must 
describe how a State will comply with MBE/WBE procurement requirements, 
including how it will apply the fair share goal to assistance 
recipients to which the requirements apply and how it will assure that 
assistance recipients take the following six affirmative steps:
    (1) Include small, minority and women's businesses on solicitation 
lists;
    (2) Assure that small, minority and women's businesses are 
solicited whenever they are potential sources;
    (3) Divide total requirements, when economically feasible, into 
smaller tasks or quantities to permit maximum participation by small, 
minority and women's businesses;

[[Page 48311]]

    (4) Establish delivery schedules, when the requirements of the work 
permits, which will encourage participation by small, minority and 
women's businesses;
    (5) Use the services of the Small Business Administration and the 
Minority Business Development Agency of the U.S. Department of 
Commerce, as appropriate; and
    (6) Require the contractor to take the affirmative steps in 
paragraphs (d)(1) through (d)(5) of this section if the contractor 
awards subagreements.
    (e) Complying with cross-cutters. A State is responsible for 
ensuring that assistance recipients comply with the requirements of 
cross-cutters, including initiating any required consultations with 
State or Federal agencies responsible for individual cross-cutters. A 
State must inform EPA when consultation or coordination with other 
Federal agencies is necessary to resolve issues regarding compliance 
with cross-cutter requirements.


Sec. 35.3580  Environmental review requirements.

    (a) General. With the exception of activities identified in 
paragraph (b) of this section, a State must conduct environmental 
reviews of the potential environmental impacts of projects and 
activities receiving assistance.
    (b) Activities excluded from environmental reviews. A State must 
conduct environmental reviews of source water protection activities 
under Sec. 35.3535, unless the activities solely involve administration 
(e.g., personnel, equipment, travel) or technical assistance. A State 
is not required to conduct environmental reviews of all the other 
eligible set-aside activities under Sec. 35.3535 because EPA has 
determined that, due to their nature, they do not individually, 
cumulatively over time, or in conjunction with other actions have a 
significant effect on the quality of the human environment. A State 
does not need to include provisions in its SERP for excluding these 
activities. Activities excluded from environmental reviews remain 
subject to other applicable Federal cross-cutting authorities under 
Sec. 35.3575.
    (c) Tier I environmental reviews. All projects that are assisted by 
the State in amounts up to the amount of the capitalization grant 
deposited into the Fund must be reviewed in accordance with a SERP that 
is functionally equivalent to the review undertaken by EPA under the 
National Environmental Policy Act (NEPA). With the exception of 
activities excluded from environmental reviews in paragraph (b) of this 
section, activities for which a State provides assistance from 
capitalization grant funds deposited into set-aside accounts must also 
be reviewed in accordance with a SERP that is functionally equivalent 
to the review undertaken by EPA under the NEPA. A State may elect to 
apply the procedures at 40 CFR part 6 and related subparts or apply its 
own ``NEPA-like'' SERP for conducting environmental reviews, provided 
that the following elements are met:
    (1) Legal foundation. A State must have the legal authority to 
conduct environmental reviews of projects and activities receiving 
assistance. The legal authority and supporting documentation must 
specify:
    (i) The mechanisms to implement mitigation measures to ensure that 
a project or activity is environmentally sound;
    (ii) The legal remedies available to the public to challenge 
environmental review determinations and enforcement actions;
    (iii) The State agency that is primarily responsible for conducting 
environmental reviews; and
    (iv) The extent to which environmental review responsibilities will 
be delegated to local recipients and will be subject to oversight by 
the primary State agency.
    (2) Interdisciplinary approach. A State must employ an 
interdisciplinary approach for identifying and mitigating adverse 
environmental effects including, but not limited to, those associated 
with other cross-cutting Federal environmental authorities.
    (3) Decision documentation. A State must fully document the 
information, processes, and premises that influence its decisions to:
    (i) Proceed with a project or activity contained in a finding of no 
significant impact (FNSI) following documentation in an environmental 
assessment (EA);
    (ii) Proceed or not proceed with a project or activity contained in 
a record of decision (ROD) following preparation of a full 
environmental impact statement (EIS);
    (iii) Reaffirm or modify a decision contained in a previously 
issued categorical exclusion (CE), EA/FNSI or EIS/ROD following a 
mandatory 5 year environmental reevaluation of a proposed project or 
activity; and
    (iv) If a State elects to implement processes for either 
partitioning an environmental review or categorically excluding 
projects or activities from environmental review, the State must 
similarly document these processes in its proposed SERP.
    (4) Public notice and participation. A State must provide public 
notice when: a CE is issued or rescinded; a FNSI is issued but before 
it becomes effective; a decision that is issued 5 years earlier is 
reaffirmed or revised; and prior to initiating an EIS. Except with 
respect to a public notice of a CE or reaffirmation of a previous 
decision, a formal public comment period must be provided during which 
no action on a project or activity will be allowed. A public hearing or 
meeting must be held for all projects and activities except for those 
having little or no environmental effect.
    (5) Alternatives consideration. A State must have evaluation 
criteria and processes which allow for:
    (i) Comparative evaluation among alternatives, including the 
beneficial and adverse consequences on the existing environment, the 
future environment, and individual sensitive environmental issues that 
are identified by project management or through public participation; 
and
    (ii) Devising appropriate near-term and long-range measures to 
avoid, minimize, or mitigate adverse impacts.
    (d) Tier II environmental reviews. A State may elect to apply an 
alternative SERP to all projects and activities (except those 
activities excluded from environmental reviews in paragraph (b) of this 
section) for which a State provides assistance in amounts that are 
greater than the amount of the capitalization grant deposited into the 
Fund or set-aside accounts, provided that the process:
    (1) Is supported by a legal foundation which establishes the 
State's authority to review projects and activities;
    (2) Responds to other environmental objectives of the State;
    (3) Provides for comparative evaluations among alternatives and 
accounts for beneficial and adverse consequences to the existing and 
future environment;
    (4) Adequately documents the information, processes, and premises 
that influence an environmental determination; and
    (5) Provides for notice to the public of proposed projects and 
activities and for the opportunity to comment on alternatives and to 
examine environmental review documents. For projects or activities 
determined by the State to be controversial, a public hearing must be 
held.
    (e) Categorical exclusions (CEs). A State may identify categories 
of actions which do not individually, cumulatively over time, or in 
conjunction with other actions have a significant effect on the quality 
of the human environment and which the

[[Page 48312]]

State will exclude from the substantive environmental review 
requirements of its SERP. Any procedures under this paragraph must 
provide for extraordinary circumstances in which a normally excluded 
action may have a significant environmental effect.
    (f) Environmental reviews for refinanced projects or reimbursed 
project costs. A State must conduct an environmental review which 
considers the impacts of a project based on conditions of the site 
prior to initiation of the project. Failure to comply with the 
environmental review requirements cannot be justified on the grounds 
that costs have already been incurred, impacts have already been 
caused, or contractual obligations have been made prior to the binding 
commitment.
    (g) EPA approval process. The RA must review and approve any State 
``NEPA-like'' and alternative procedures to ensure that the 
requirements for Tier I and Tier II environmental reviews have been 
met. The RA will conduct these reviews on the basis of the criteria for 
evaluating NEPA-like reviews contained in Appendix A to this subpart.
    (h) Modifications to approved SERPs. Significant changes to State 
environmental review procedures must be approved by the RA.


Sec. 35.3585  Compliance assurance procedures.

    (a) Causes. The RA may take action under this section and the 
enforcement provisions of the general grant regulations at 40 CFR 31.43 
if a determination is made that a State has not complied with its 
capitalization grant agreement, other requirements under section 1452 
of the Act, this subpart, or 40 CFR part 31 or has not managed the 
DWSRF program in a financially sound manner (e.g., allows consistent 
and substantial failures of loan repayments).
    (b) RA's course of action. For cause under paragraph (a) of this 
section, the RA will issue a notice of non-compliance and may prescribe 
appropriate corrective action. A State's corrective action must remedy 
the specific instance of non-compliance and adjust program management 
to avoid non-compliance in the future.
    (c) Consequences for failure to comply. (1) If within 60 days of 
receipt of the non-compliance notice a State fails to take the 
necessary actions to obtain the results required by the RA or fails to 
provide an acceptable plan to achieve the results required, the RA may 
suspend payments until the State has taken acceptable actions. Once a 
State has taken the corrective action deemed necessary and adequate by 
the RA, the suspended payments will be released and scheduled payments 
will recommence.
    (2) If a State fails to take the necessary corrective action deemed 
adequate by the RA within 12 months of receipt of the original notice, 
any suspended payments will be deobligated and reallotted to eligible 
States. Once a payment has been made for the Fund, that payment and 
cash draws from that payment will not be subject to withholding. All 
future payments will be withheld from a State and reallotted until such 
time that adequate corrective action is taken and the RA determines 
that the State is back in compliance.
    (d) Dispute resolution. A State or an assistance recipient that has 
been adversely affected by an action or omission by EPA may request a 
review of the action or omission under general grant regulations at 40 
CFR part 31, subpart F.

Appendix A to Subpart L--Criteria for Evaluating a State's Proposed 
NEPA-Like Process

    The following criteria will be used by the RA to evaluate a 
proposed SERP:
    (A) Legal foundation. Adequate documentation of the legal 
authority, including legislation, regulations or executive orders 
and/or Attorney General certification that authority exists.
    (B) Interdisciplinary approach. The availability of expertise, 
either in-house or otherwise, accessible to the State agency.
    (C) Decision documentation. A description of a documentation 
process adequate to explain the basis for decisions to the public.
    (D) Public notice and participation. A description of the 
process, including routes of publication (e.g., local newspapers and 
project mailing list), and use of established State legal 
notification systems for notices of intent, and criteria for 
determining whether a public hearing is required. The adequacy of a 
rationale where the comment period differs from that under NEPA and 
is inconsistent with other State review periods.
    (E) Alternatives consideration. The extent to which the SERP 
will adequately consider:
    (1) Designation of a study area comparable to the final system;
    (2) A range of feasible alternatives, including the no action 
alternative;
    (3) Direct and indirect impacts;
    (4) Present and future conditions;
    (5) Land use and other social parameters including relevant 
recreation and open-space considerations;
    (6) Consistency with population projections used to develop 
State implementation plans under the Clean Air Act;
    (7) Cumulative impacts including anticipated community growth 
(residential, commercial, institutional, and industrial) within the 
project study area; and
    (8) Other anticipated public works projects including 
coordination with such projects.

[FR Doc. 00-19783 Filed 8-6-00; 8:45 am]
BILLING CODE 6560-50-P