Drinking Water: Key Aspects of EPA's Revolving Fund Program
Needed to Be Strengthened (24-JAN-02, GAO-02-135).
The Environmental Protection Agency (EPA) estimates that $150
billion will be needed during the next 20 years to repair,
replace, and upgrade the nation's 55,000 community water systems.
Congress established the Drinking Water State Revolving Fund
(DWSRF) program in 1996 to help communities finance the
infrastructure projects needed to comply with federal drinking
water regulations. EPA has developed a survey to collect data on
the nature and cost of infrastructure improvements needed at
local water systems. EPA has taken several steps to validate the
data included in its $150 billion estimate, including visits to
selected sites. However the agency has yet to calculate and
report on the estimate's precision. GAO found that EPA is not
taking full advantage of oversight tools to monitor states'
implementation of the DWSRF. First, EPA is developing financial
management and other measures to monitor state progress and
support agency's review of state programs. Until these draft
measures are finalized and applied consistently, their usefulness
as an oversight tool will be limited. Second, the untimely and
inconsistent preparation of program evaluation report
reviews--one of EPA's primary oversight tools--has hampered the
agency's ability to identify common or recurring problems. Third,
gaps in the financial audit coverage and a limited review of the
completed audits undermine EPA's ability to fully assess the
financial conditions of the state's DWSRF programs.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-135
ACCNO: A02617
TITLE: Drinking Water: Key Aspects of EPA's Revolving Fund
Program Needed to Be Strengthened
DATE: 01/24/2002
SUBJECT: Data collection
Data integrity
Facility maintenance
Facility repairs
Federal funds
Revolving funds
Surveys
Water quality
Water treatment
Clean Water State Revolving Fund
Drinking Water State Revolving Fund
HUD Community Development Block Grant
Program
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GAO-02-135
United States General Accounting Office
GAO
Report to Congressional Requesters
January 2002
DRINKING WATER
Key Aspects of EPA's Revolving Fund Program Need to Be Strengthened
GAO-02-135
Contents
Letter
Results in Brief
Background
Level of Precision Needed to Assess the Accuracy of EPA's
Estimate States Have Made Limited Use of the Optional DWSRF Provision to
Assist Disadvantaged Communities EPA Is Not Taking Full Advantage of Its
Oversight Tools to
Monitor the States' Implementation of the DWSRF Program Conclusions
Recommendations for Executive Action Agency Comments Scope and Methodology
1
3 4
6
10
18 29 30 30 31
Appendix I Efforts to Determine the Universe of Water Systems Eligible for
DWSRF Disadvantaged Assistance
Appendix II GAO's Survey of State Drinking Water Officials Regarding
Assistance to Disadvantaged Communities 36
Appendix III Comments from EPA's Office of Water
Appendix IV Comments from EPA's Office of Inspector General
Appendix V GAO Contact and Staff Acknowledgments
Tables
Table 1: Types of Assistance Offered to Disadvantaged
Communities, by State, through December 31, 2000 13 Table 2: Percentage of
DWSRF Capitalization Grants Used for Subsidies to Disadvantaged Communities,
by State, through December 31, 2000 15
Table 3: Scope of Independent Audit Reports Submitted to Inspector General
27
Figures
Figure 1: Distribution of Estimated Infrastructure Needs, by System Size 5
Figure 2: Assistance to Disadvantaged Communities Under the DWSRF Program,
by State 12
Abbreviations
DWSRF Drinking Water State Revolving Fund
EPA Environmental Protection Agency
NIMS National Information Management System
OIG Office of Inspector General
PER Program Evaluation Review
United States General Accounting Office Washington, DC 20548
January 24, 2002
The Honorable W. J. (Billy) Tauzin
Chairman, Committee on Energy and Commerce
House of Representatives
The Honorable Paul E. Gillmor
Chairman, Subcommittee on Environment
and Hazardous Materials
Committee on Energy and Commerce
House of Representatives
The Environmental Protection Agency's (EPA) most recent national
survey of drinking water infrastructure needs estimates that $150.9 billion
will be needed over the next 20 years to repair, replace, and upgrade the
nation's 55,000 community water systems to protect public health.1 To help
communities finance the infrastructure projects needed to comply with
federal drinking water regulations and protect public health, the Congress
established the Drinking Water State Revolving Fund (DWSRF) program in
1996. So far, states have cumulatively received over $4 billion to establish
revolving loan funds to finance improvements at local drinking water
systems. On an annual basis, DWSRF appropriations account for about
10 percent of EPA's budget at current funding levels.
Under the 1996 amendments to the Safe Drinking Water Act (SDWA), EPA
is required to conduct an assessment of water systems' capital
improvement needs every 4 years. To this end, EPA developed a survey to
collect data on the nature and cost of infrastructure improvements needed
at local water systems. EPA designed its survey to provide a high level of
precision for the estimated drinking water infrastructure needs.
Specifically, EPA set precision targets such that its national and
state-level
estimates would have a 95 percent likelihood of falling within 10 percent
of the actual need.
To establish the DWSRF, the 1996 amendments authorized $9.6 billion, to
be appropriated through 2003. In its annual budgets, EPA requests
appropriations to capitalize the states' funds and then makes specific
1Drinking Water Infrastructure Needs Survey: Second Report to the Congress,
EPA 816-R-01-004, Office of Water (February 2001).
allotments, or capitalization grants, to each state for that purpose. The
states use the grants to make low-interest loans to their local water
systems for improvements that are needed to comply with federal drinking
water regulations and protect public health. As the loans are repaid, the
states' funds are replenished, enabling them to make loans to other eligible
drinking water projects. To help meet the needs of communities that qualify
as "disadvantaged," states may extend loan repayment periods or use an
amount equal to up to 30 percent of their annual capitalization grants to
provide additional subsidies to these communities, such as offering
principal forgiveness.
Given the size and significance of the DWSRF program, the 1996 amendments
and EPA's implementing regulations include provisions to develop tools, such
as information systems, performance reviews, and financial audits, to help
EPA monitor the states' implementation of the DWSRF program and evaluate
program effectiveness. For example, when EPA promulgated its DWSRF
regulations, it established a national information management system (NIMS)
to better assess the DWSRF program, monitor state progress, and provide
assistance in the agency's annual reviews of state programs. EPA also set up
a process whereby its regional offices annually assess key aspects of state
DWSRF programs: achievement of state program goals and objectives;
compliance with grant agreements and applicable statutory provisions, such
as funding priorities; and the program's financial status. To determine the
adequacy of the financial controls in the DWSRF program, EPA's regulations
provide that states may voluntarily agree to conduct annual independent
audits that cover the financial statements, internal controls, and
compliance with applicable requirements. States that do not conduct their
own audits are subject to periodic audits by the EPA Office of Inspector
General (OIG).
Concerned about the adequacy of federal, state, local, and private resources
to meet local drinking water infrastructure needs, you asked us to examine
three aspects of the DWSRF program: (l) the accuracy of EPA's needs
assessment estimate; (2) the extent to which states use the optional
provision for assisting disadvantaged communities; and (3) EPA's efforts to
monitor states' implementation of the DWSRF program. To address the first
objective, we analyzed certain aspects of the methodology that EPA used to
derive its drinking water needs estimate, specifically the impact of
sampling on the estimate's precision. For the second objective, we surveyed
all 50 states to determine how states use DWSRF funds to assist
disadvantaged communities. For the third objective, among other things, we
conducted a content analysis of the reports on EPA's Program Evaluation
Reviews (PER)-one of the
Results in Brief
principal oversight tools that EPA uses to monitor the states' compliance
with DWSRF program requirements.
EPA has taken a number of steps to validate the data included in its $150.9
billion estimate of the nation's drinking water infrastructure needs, such
as conducting site visits to selected systems and asking states to review
supporting documentation. However, EPA and other users of the needs
assessment cannot get a sense of the estimate's accuracy-how closely the
estimate reflects actual needs-until EPA calculates and reports the
estimate's level of precision. Although EPA set a target for the precision
of its estimate, without calculating the level of precision actually
achieved, EPA cannot determine whether it met, or fell short of, this
target. Because the survey's results influence the level of congressional
appropriations for the DWSRF and, more importantly, form the basis for EPA's
allotment of these funds to the states, we are recommending that EPA
calculate and report the level of precision actually achieved in its recent
needs assessment, and determine what implications, if any, its findings have
on the methodology used to conduct future needs assessment surveys.
Thirty-one states have established programs as part of their DWSRF to assist
disadvantaged communities, according to the results of our 50-state survey.
Of the states with programs, 21 provided about $94 million in special
subsidies-mainly principal forgiveness-and 23 offered extended loan terms.
While criteria for defining disadvantaged communities vary, states typically
use some measure of household water rates relative to a community's median
household income. In addition, states reported that other factors, such as
concerns about depleting the fund and the availability of assistance from
other federal and state sources, influenced their decisions to offer DWSRF
assistance to disadvantaged communities.
EPA is not taking full advantage of the oversight tools that are currently
available to monitor states' implementation of the DWSRF program. First, EPA
is using its national drinking water information management system to
develop financial management and other measures to monitor state progress
and support the agency's review of state programs; however, until these
draft measures are finalized and consistently applied, their utility as an
oversight tool is limited. Second, the untimely and inconsistent preparation
of PER reports-one of EPA's principal oversight tools-hamper its ability to
use the reports to identify common or recurring problems. Finally, gaps in
the financial audit coverage, and a limited review of the audits that are
performed, hamper EPA's ability to
Background
fully assess the financial condition of the states' DWSRF programs. We are
recommending several actions to improve EPA's use of available oversight
tools to monitor states' implementation of the DWSRF program.
We provided a draft of our report to EPA for its review and comment. EPA
generally agreed with our recommendations and offered technical
clarifications, which we incorporated, as appropriate. In addition, we
restated the basis for our recommendation for EPA to calculate and report
the level of precision actually achieved in its needs assessment survey.
EPA is required to conduct an infrastructure needs assessment every 4 years
to estimate the future capital investment needs of drinking water systems
eligible for DWSRF assistance.2 EPA's assessment is designed to include
"infrastructure needs that are required to protect public health, such as
projects to preserve the physical integrity of the water system, convey
treated water to homes, or ensure continued compliance with specific Safe
Drinking Water Act regulations."3 EPA's most recent needs survey estimates
that $150.9 billion will be required from private and public sources over
the next 20 years to finance drinking water infrastructure projects. About
80 percent of the total need ($119.7 billion) is linked to projects
involving the installation, upgrade, and replacement of the basic
infrastructure needed to deliver safe drinking water to the public. The rest
of the need-$31.2 billion, or about 20 percent-will go to projects directly
associated with regulatory compliance, including $21.9 billion for
compliance with existing regulations and $9.3 billion related to proposed or
recently issued regulations, such as those for arsenic and radon.
While the smallest water systems represent over 80 percent of all community
water systems, they account for only about 22 percent of the total estimated
infrastructure needs. In contrast, the largest water systems represent about
2 percent of the community systems and account for the nearly 44 percent of
total needs. Figure 1 shows infrastructure needs, by system size.
2Eligible systems include community water systems and not-for-profit
noncommunity water systems. Community water systems serve at least 25 people
or 15 connections year-round. Noncommunity water systems serve at least 25
people for more than 60 days but less than year-round.
3Drinking Water Infrastructure Needs Survey Second Report to Congress, p.
11.
Figure 1: Distribution of Estimated Infrastructure Needs, by System Size
Notes: The analysis does not include the costs associated with proposed or
recently promulgated Safe Drinking Water Act regulations, which are
estimated to be $9.3 billion in total.
The "Other" category includes the needs associated with not-for-profit
noncommunity water systems and American Indian and Alaska Native Village
systems.
Source: Drinking Water Infrastructure Needs Survey Second Report to
Congress, U.S. Environmental Protection Agency (February 2001), p.12.
Subsidized loan assistance is an integral part of the DWSRF program in that
the interest rates that states offer to local water systems must be at or
below the current market rate.4 In addition, the Congress has authorized
states to use an amount equal to up to 30 percent of their DWSRF
capitalization grants to provide additional subsidies to communities that
meet state-defined affordability criteria and thus qualify as
"disadvantaged."5 States with disadvantaged community programs may opt
4According to EPA, the weighted average interest rate of DWSRF loans in 2001
was 2.4 percent, or about 3 percent less than the market rates reported by
the states.
5The 1996 amendments to the Safe Drinking Water Act defined the term
"disadvantaged community" to mean the service area of a public water system
that meets affordability criteria established by the state.
to forgive a portion of the loan principal or issue a loan at a negative
interest rate. States also have the option of extending the loan repayment
period from the standard 20 years to up to 30 years, provided that the
repayment period does not exceed the expected design life of the project.
The 1996 amendments and EPA's regulations contain provisions that address
EPA's role in ensuring that states effectively implement the DWSRF program.
For example, when EPA promulgated its DWSRF regulations, it established an
information management system to collect specific information on how states'
DWSRF moneys are being spent. EPA also set up a process whereby its regional
offices annually (1) assess the success of the states' performance of
activities identified in their intended use plans6 and other reports
submitted to EPA and (2) determine compliance with requirements in the law,
applicable regulations, and the grant agreement. To determine the adequacy
of the financial controls in the DWSRF program, the 1996 amendments required
EPA to periodically audit state loan funds. Accordingly, EPA's regulations
mandate state compliance with the provisions of the Single Audit Act.7 EPA's
regulations further provide that states may voluntarily agree to conduct
annual independent audits that cover financial statements, internal
controls, and compliance with applicable requirements. States that do not
conduct their own independent audits are subject to periodic audits by the
EPA Office of Inspector General (OIG).
EPA has taken a number of steps to ensure the validity of the information in
its needs estimate, such as conducting site visits to selected systems and
asking states to review supporting documentation. However, while the agency
set a target for the precision of its estimate, it did not determine how
close it came to actually achieving its target. As a result, EPA and other
users of the needs assessment cannot get a sense of the extent to
6By law, states must file annual "intended use plans" that provide detailed
information on the projects to be assisted, the criteria for distributing
the assistance, the financial status of the fund, and other information.
7The Single Audit Act, as amended in 1996, established the concept of
replacing multiple grant audits with one audit of a recipient, as a whole. A
single audit is an organization-wide audit that focuses on the recipient's
internal controls and its compliance with laws and regulations governing
federal awards. Auditors determine which federal programs to include in the
scope of a single audit based upon the level of federal expenditures and
risk. At a minimum, the audit will cover all of the major programs receiving
significant funding unless the auditor deems the programs to be low-risk.
Level of Precision Needed to Assess the Accuracy of EPA's Estimate
which EPA's estimate reflects actual needs, particularly with regard to how
the total needs are apportioned among the 50 states.
EPA Took Steps to Validate Its Data, but Did Not Calculate or Report a Level
of Precision When Estimating the Nation's Drinking Water Infrastructure
Needs
EPA has taken a number of steps to ensure that the information it collected
about infrastructure needs at local water systems-and the cost of addressing
those needs-was accurate. For example, EPA sent a questionnaire to large and
medium-sized systems to collect information on capital projects needed to
protect the public health. EPA surveyed 100 percent of the largest water
systems (defined, for this purpose, as those serving populations of more
than 40,000) and a statistical sample of medium-sized systems, which
amounted to about one-third of the systems serving populations between 3,300
and 40,000. According to EPA's report to the Congress,8 the water systems
were asked to
* describe each project and provide documentation explaining why it is
needed;
* indicate whether the project would address a current or future need,
involves installing new or rehabilitating existing infrastructure, and is
triggered by a SDWA regulation; and
* provide a cost estimate along with related documentation or the project's
design capacities so that EPA could use a model to estimate the costs.
For the smallest water systems, EPA decided that collecting data through
site visits by trained water systems specialists would provide better
information than using the questionnaire approach, because small systems
generally lack the data and personnel to complete a questionnaire of this
type. EPA selected a statistical sample of about 600 small water systems for
these site visits.
In addition to the documentation requirements, EPA arranged for each
questionnaire response to be reviewed by cognizant state officials to ensure
that systems thoroughly identified and correctly documented their needs. In
its February 2001 report to the Congress, EPA reported that about 14 percent
of the 86,057 projects submitted had been eliminated because the
documentation criteria had not been met or the project appeared to be
ineligible for DWSRF assistance.9
8Drinking Water Infrastructure Needs Survey Second Report to Congress, p.
58. 9Drinking Water Infrastructure Needs Survey Second Report to Congress,
p. 23.
In the case of the large and medium-sized systems, EPA obtained information
from a sufficient number of systems to estimate infrastructure needs on a
state-by-state basis. However, EPA officials explained that the agency did
not have the resources to send specialists to enough small systems to get an
accurate picture of needs on a state-level basis. Specifically, EPA
estimated that it would have to conduct site visits at approximately 22,000
small water systems to collect enough data to estimate needs on a
state-by-state basis. Therefore, EPA used the results from its site visits
to small systems to calculate a national-level estimate of small system
infrastructure needs and then apportioned the total among the states on the
basis of each state's small systems, categorized by population served and
type of water source.
In conducting its needs assessment, EPA's goal was to provide "statistically
precise" estimates of the infrastructure needs in each state. For the large
and medium-sized systems, which typically comprise the majority of a state's
needs, EPA set a precision target of plus or minus 10 percent, at the 95
percent confidence level. The target represented a 95 percent likelihood
that the actual or "true" need for a particular state fell within 10 percent
of the amount estimated. Similarly, for the small water systems, the
precision target of the national-level estimate was set at plus or minus 10
percent, at the 95 percent confidence level.
In an effort to assess the accuracy of EPA's needs estimate, we performed a
limited review of the methodology EPA used to derive its drinking water
needs estimate, particularly the impact of sampling on the estimate's
precision, and determined that EPA probably did not achieve the intended
level of precision. We found some indications that the actual level of
uncertainty, or sampling error,10 was higher than EPA's target, possibly by
a considerable amount. For example, although EPA was able to use data from
its 1995 survey in determining the sample size for its 1999 survey, use of
these data biased its calculations. Specifically, the agency's approach did
not account for the fact that it extensively used average costs estimated
from models when calculating its sample size.11 The practice of
10Sampling error is a measure of the amount of uncertainty that exists about
the true cost when costs are estimated from a sample of systems rather than
from data collected from all systems.
11For example, in its current needs assessment, EPA had to rely on
modeling-and substituted the average costs generated by the models-for 67
percent of the capital projects identified in its needs survey, including
over 80 percent of the projects associated with small water systems.
Modeling was necessary because project-specific documentation was not
available in many instances.
using average costs understated the extent that costs varied from one system
to the next. Furthermore, estimating highly variable costs typically
requires a larger sample size than is required in situations with limited
cost variability. Therefore, EPA's sample sizes were probably too small, and
it is likely that EPA did not collect data from enough systems to achieve
its precision target.
Another indication that EPA did not meet its precision target specifically
concerns the estimate for small system needs. Even though EPA's technical
experts believed that a simple random sample12 would be required to achieve
the intended precision target, EPA deviated from this sampling methodology
in two important ways. First, taking into account the prohibitive travel
costs associated with visiting 600 randomly selected systems located
throughout the country, EPA instead used statistical sampling to select 100
geographical areas and then chose six systems within each area. Although an
acceptable approach, such a statistical sampling technique can require a
considerably larger sample size than when simple random sampling is used to
achieve the desired level of precision. However, EPA did not increase its
sample size to account for the change in sampling technique, which could
have adversely affected the sampling error. Second, based on recommendations
from an advisory workgroup,13 EPA intentionally selected at least one area
in each of the 50 states, Puerto Rico, and the U.S. Virgin Islands. Such
geographical constraints had the potential to increase the sampling error,
thereby reducing the level of precision of EPA's estimate.
EPA's Needs Assessment The 1996 amendments to the Safe Drinking Water Act
require EPA to use Serves as the Basis for the results of its most recent
needs assessment survey to allocate the DWSRF Allotments to the amount of
each state's annual DWSRF allotment. According to EPA, its States periodic
surveys are intended to provide statistically precise estimates of
need for each of the states. Then, EPA allocates the DWSRF funds on the
basis of each state's share of the total national need, except that each
state receives a minimum share of 1 percent.
12 In a simple random sample, each system has an equal chance of being
included in the sample.
13The workgroup consisted of state, American Indian, Alaskan Native Village,
Indian Health Service, and EPA representatives.
States Have Made Limited Use of the Optional DWSRF Provision to Assist
Disadvantaged Communities
Although EPA has calculated and reported the actual precision levels for
other surveys, EPA officials told us that doing so for the drinking water
needs assessment would not be worthwhile, because it would not affect the
allocation of DWSRF funds to the states. In addition, according to an EPA
official responsible for managing the periodic needs surveys, EPA has
already invested approximately 4 years and $3.6 million to implement its
most recent assessment and summarize the results. The official said that
calculating the actual precision of the cost estimates would cost at least
an additional $30,000 to $40,000. Moreover, actually achieving the precision
target could further increase the agency's costs, depending on how many
additional site visits were needed. However, a number of leading survey
research associations advocate for the calculation and reporting of the
precision level to fully inform users of a sample's limitations.14
Furthermore, by knowing the precision level of the estimate a user can
better judge the estimate's accuracy. Given EPA's investment in the survey
thus far-and the billions of dollars that will ultimately be allotted to the
states-the benefits of determining the estimate's precision level appear to
outweigh the projected costs.
According to the results of our 50-state survey, 31 states have established
programs as part of their DWSRF to assist disadvantaged communities. Of
these 31 states, 21 provided about $94 million in special subsidies-mainly
principal forgiveness-and 23 offered extended loan terms through December
31, 2000. 15 While criteria for disadvantaged communities vary, states
typically use some measure of household water rates relative to a
community's median household income. In addition, several factors influence
states' decisions to offer DWSRF assistance to disadvantaged communities,
such as concerns about depleting the fund and the availability of assistance
from other federal and state sources.
14The American Association for Public Opinion Research, "in the spirit of
upgrading current survey practice," has promulgated a list of best practices
that includes reporting a measure of each estimate's precision along with
the estimate, rather than reporting only the statistic itself. In addition,
the Council of American Survey Research Organizations' code of standards and
ethics requires that estimates of sampling error be calculated and
"available."
15We used this date because, as part of our analysis, we compared the
states' subsidies to disadvantaged communities with the amount of the
states' capitalization grants. At the time that we issued our 50-state
questionnaire, the most recent information available on state capitalization
grants was as of December 31, 2000.
Thirty-One States Offer DWSRF Assistance to Disadvantaged Communities
Thirty-one states have adopted a disadvantaged community program and offer
assistance in the form of loan subsidies-that is, forgiving a portion of the
loan principal or issuing a loan at a negative interest rate-or extended
loan terms.16 As of December 31, 2000, 25 of these states had actually
provided assistance to qualified communities. Three of the 19 states that
did not have disadvantaged community programs reported plans to offer such
assistance as part of their DWSRF programs within the next 3 years. Figure 2
shows DWSRF assistance to disadvantaged communities, by state.
16States may extend the loan repayment period from the standard 20 years to
up to 30 years, provided that the repayment period does not exceed the
expected design life of the project. While an extended loan term makes
financing a project more affordable to a community by reducing the amount of
monthly payments, it is not considered a loan subsidy.
Figure 2: Assistance to Disadvantaged Communities Under the DWSRF Program,
by State
Note: Colorado, Ohio, and Rhode Island reported that they plan to adopt
disadvantaged community programs within the next 3 years.
Source: GAO's survey of 50 state drinking water programs.
Most States with Most states that have a disadvantaged community program
offer principal Disadvantaged Community forgiveness or extended loan terms
for capital improvement projects. Programs Offer Principal States rarely
offer negative interest rate loans to disadvantaged
communities because, according to state DWSRF officials, they find
thisForgiveness or Extended option difficult to explain to local communities
and difficult to administer.Loan Terms Table 1 shows the type of assistance
available to disadvantaged
communities, by state.
Table 1: Types of Assistance Offered to Disadvantaged Communities, by State,
through December 31, 2000
State
Number of loan agreements with one or more types of assistance
Principal forgiveness
Negative interest rate loans
Extended loan terms
Alaska 10 x
Arkansas 7
Arizona 1 x x
California 10 x
Delaware 1 x
Florida 20 x
Georgia 21 x
Idaho 0 x
Indiana 10
Kentucky 0
Maryland 2 x
Maine 17 x
Michigan 3 x
Minnesota 5 x
Montana 2
Nebraska 17 x
New Hampshire 0 x
New Mexico 0 x x
Nevada 0 x
New York 8 x x
Oregon 9x x
Pennsylvania 9 x
South Carolina 1 x
South Dakota 4 x
Tennessee 0 x x
Texas 6x x
Utah 4x
Virginia 19 x x
Vermont 16 x x
Washington 4 x
State
Number of loan agreements with one or more types of assistance
Principal forgiveness
Negative interest rate loans
Extended loan terms
West Virginia 8
Total 289 19 3 26
Note: As indicated in the table, six states (Idaho, Kentucky, New Hampshire,
New Mexico, Nevada, and Tennessee) had not provided assistance as of
December 31, 2000. These states had no loan agreements that included
assistance to disadvantaged communities. In addition, of the four states
that offer both principal forgiveness and extended loan terms, Arizona,
Delaware, and Michigan had offered only extended loan terms, while
California had used only principal forgiveness.
Source: GAO's survey of 50 state drinking water programs.
Some states limit the amount of loan subsidies they provide to disadvantaged
communities. For example, 11 states have established caps on the amounts of
their loan subsidies, such as $500,000 per project or 50 percent of the
project costs. Another eight states offer principal forgiveness only in
cases when extending the loan term to 30 years does not make the cost of a
project affordable to the community. For example, any water system in
California that qualifies for assistance as a disadvantaged community
automatically receives a loan at 0 percent interest and with a term extended
to 30 years. If, under those conditions, the system's rates still exceed 1.5
percent of the community's median household income, then the state will
offer principal forgiveness-but only if the system is publicly owned. Two of
the three states that offer negative interest rate loans reduce the interest
rates on individual project loans incrementally until a community's water
rates reach some type of affordability threshold. For example, the Vermont
DWSRF program reduces the interest rate on a project loan by one-tenth of 1
percent until a community's water rates reach an affordable level (as
defined by the state), but the interest rate may not fall below negative 3
percent.
In addition to loan subsidies and extended loan terms, many states offer
disadvantaged communities special interest rates that are less than the
interest rates available to other DWSRF applicants.17 According to our
survey results, 20 states offer specially reduced interest rates as low as 0
percent to disadvantaged communities. In addition, four states that
currently do not have disadvantaged community programs offer specially
reduced interest rates to communities with "higher needs."
17The standard DWSRF interest rate offered to loan applicants varies by
state, but must be at or below the current market rate.
Under the 1996 amendments to the Safe Drinking Water Act, the Congress
authorized states to use an amount equal to up to 30 percent of their DWSRF
capitalization grants to provide additional subsidies to communities that
qualify as "disadvantaged." To get a rough estimate of the magnitude of
states' use of loan subsidies, we compared the capitalization grants
received by the states as of December 31, 2000, and the amount of loan
subsidies the states had provided within the same time period. We found that
of the 14 states that had provided loan subsidies,18 only Maine came close
to reaching the 30 percent cap. Table 2 shows the amount of each state's
loan subsidies as a percentage of its capitalization grants through December
31, 2000.
Table 2: Percentage of DWSRF Capitalization Grants Used for Subsidies to
Disadvantaged Communities, by State, through December 31, 2000
State
Subsidies to disadvantaged communities as percentage of total DWSRF
capitalization grants Total DWSRF capitalization grants to states Amount of
DWSRF subsidies to disadvantaged communities
Source: GAO's
analysis of EPA
data and GAO's
survey of 50
state drinking
water programs.
18Although 21
states offer
subsidy
assistance in
their
disadvantaged
community
programs, only
14 states have
actually
forgiven a
portion of the
loan principal or reduced the loan interest rate below zero percent.
State Criteria for Disadvantaged Community Assistance Vary
Under the DWSRF program, states have the flexibility to develop their own
criteria to define a disadvantaged community. States with disadvantaged
community programs typically use some measure of household water rates
relative to the community's median household income to qualify a community
as "disadvantaged." This approach allows the state to assess the impact of
capital project debt on the community's water rates and measure the
project's affordability. Of the 31 states with a disadvantaged community
program, 27 have adopted criteria that consider local water rates, often in
conjunction with a community's median household income. For example, seven
states have determined that a community qualifies as "disadvantaged" if its
water rates are at least 1 percent of its median household income.19 Another
11 states have established thresholds for local water rates ranging from
1.25 to 2 percent of median household income. The remaining nine states use
different thresholds depending on the community's median household income or
a formula that considers other factors.
Twenty-one states use median household income as a criterion in determining
whether communities qualify as disadvantaged.20 Of these 21 states,
* 14 required a community's median household income to be at or below the
median income for the state to be considered disadvantaged and 4 other
states compare local household income with the median income for the county;
* 9 offered assistance to disadvantaged communities only if the local median
household income is no higher than 80 percent of the state or county median.
In seven states, a community is eligible for assistance if the local median
income is equal to-or, in one case, 90 percent of-the median household
income for the state;
* In Michigan and Nebraska, a community can qualify for assistance with a
median household income as high as 120 percent of the state's median income,
provided that the system is publicly owned and its water rates exceed the
state's affordability threshold; and
19According to EPA's report National-Level Affordability Criteria Under the
1996 Amendments to the Safe Drinking Water Act (Aug. 31, 2000), the average
American household typically spends 0.7 percent of its income on water.
20The state of Utah also has an income-based criterion, but the state uses
the median adjusted gross income rather than household income.
* 19 considered both median household income and water rates in their
definition of disadvantaged communities.
In addition to the financial criteria, some states have other qualifications
that a community must meet before becoming designated as disadvantaged. For
example, in 11 states only publicly owned water systems are eligible for
loan subsidies; privately owned water systems, such as mobile home parks,
are not eligible for such assistance. Four states indicated that a
community's drinking water must pose a significant public health risk to the
residents for the community to be eligible for special assistance. In two
states, a water system must serve a small community to qualify as a
disadvantaged community.21
In the course of our review, we noted that while many states offer a wide
variety of DWSRF disadvantaged community programs, only a handful of states
have made an attempt to estimate the universe of water systems that met
state-defined criteria for disadvantaged communities. Using the data
provided in EPA's national sample of small water systems, we attempted to
estimate the number of systems that might qualify for disadvantaged
assistance. (See app. I for details.)
Several Factors Influence As part of our questionnaire, we asked the states
to report reasons why States' Decisions to Adopt they had chosen not to
adopt a DWSRF program for disadvantaged Disadvantaged Community communities.
Of the 19 states without disadvantaged community Programs programs, we found
that
* 16 states cited concerns about maintaining the corpus of the fund or the
long-term viability of the fund as a major (12) or moderate (4) reason for
not establishing a disadvantaged community program;
* 14 states cited the fact that their DWSRF program already offers loans at
below-market interest rates as a major (9) or moderate (5) reason for not
offering additional assistance to disadvantaged communities; and
* 12 states cited the availability of other federal or state programs to
address the needs of disadvantaged communities as a major (5) or moderate
(9) reason for not providing assistance through the DWSRF.22
21Arizona defines a small community as one with a population of 10,000 or
less. Virginia defines a small community as one with a population of 3,300
or less.
22Our responses do not add to 12 because some states cited the availability
of both federal and state funding as reasons for not using their DWSRF to
assist disadvantaged communities.
Non-DWSRF financing from other federal and state sources is available to
help disadvantaged communities, and many states coordinate with these
sources to help disadvantaged communities secure the funding they need.
According to the state drinking water officials we interviewed,
disadvantaged communities often receive a combination of DWSRF and non-DWSRF
funding to finance their drinking water projects. For example, the
Department of Agriculture's Rural Utilities Service and the Department of
Housing and Urban Development's Community Development Block Grant program
provide grants and loans for activities such as drinking water and
wastewater projects, planning, and technical assistance. These programs
target rural and/or low-to-moderate income communities.
In addition to federal programs, many states sponsor their own grant or loan
programs. In our survey, more than half the states indicated that they
provided some type of financial assistance for drinking water projects. Six
of the 19 states without disadvantaged community programs had state grant or
loan programs intended specifically to help economically distressed
communities finance drinking water improvement projects. We recently
reported that states sponsored over $9 billion in grants and loans for
drinking water and/or wastewater infrastructure improvements from fiscal
year 1991 through fiscal year 2000. 23 Most of the assistance was generally
available, but some assistance was specifically targeted at economically
distressed communities.
As part of its ongoing effort to monitor states' implementation of the DWSRF
program, EPA has developed a national information management system to track
states' use of DWSRF funds. While EPA is using the system to develop
financial management and other measures, until these measures are
consistently applied during performance reviews of state DWSRF programs,
their utility as an oversight tool is limited. Furthermore, problems with
the timely and consistent preparation of PER reports-one of EPA's principal
oversight tools-hamper its ability to use the reports to identify common or
recurring problems among the states. Finally, gaps in the financial audit
coverage, and a limited review of audits that are performed, affect EPA's
ability to fully assess the financial condition of the states' DWSRF
programs.
EPA Is Not Taking Full Advantage of Its Oversight Tools to Monitor the
States' Implementation of the DWSRF Program
23 Water Infrastructure: Information on Federal and State Financial
Assistance (GAO-02-134, Nov. 30, 2001).
EPA Could Make Better Use of Its Information System to Monitor State
Performance and Provide Information on Overall Program Effectiveness
EPA designed its drinking water national information management system
(NIMS) to better assess the DWSRF program, monitor state progress, and
provide assistance in the agency's annual reviews of state programs. The
NIMS database contains a variety of information on the amount and status of
DWSRF moneys, the states' progress in getting funds to local communities,
the types of assistance being provided, and other information. Currently,
EPA's information system can produce 83 standard reports on various aspects
of the DWSRF program. For example, NIMS can report the amount of assistance
by system size and type of project, such as the construction of treatment or
storage facilities, construction of distribution systems, or land
acquisition, as well as the amount of assistance provided to small water
systems. EPA requires states to submit information annually on their use of
DWSRF funds, and updates NIMS accordingly.24 NIMS can produce reports
showing information on an annual or cumulative basis, aggregate information
on a state-by-state basis or by EPA region, and provide customized reports.
EPA's NIMS database and the reports that it can generate provide a useful
national perspective on the DWSRF program in terms of the amount and type of
assistance that states provide to local communities. For example, EPA can
use NIMS data to determine the cumulative amount of DWSRF assistance as a
percentage of the funds available since the program's inception. EPA can
also provide cumulative reports on the pace of the DWSRF program in getting
assistance out to local communities, including such information as project
starts, project disbursements, projects completed, and loan principal
repayments.
While useful in many ways, NIMS has some limitations in monitoring state
progress. In particular, the system was not designed to monitor the extent
that states comply with statutory spending restrictions. According to EPA
officials, NIMS was designed to track the states' overall program activity
using funds from multiple sources, including capitalization grants, state
matching funds, and other sources, such as loan repayments. They also noted
that designing a system capable of tracking compliance with the spending
restrictions would be difficult and unworkable because of the timing of the
movement of funds in the program. For example, states can receive annual
grants over a 2-year period and may obligate funds from one grant to
projects over a period of several years.
24Currently, the system contains information covering the period from July
1, 1997, through June 30, 2001.
In addition to tracking some elements of state progress, NIMS provides
useful information that EPA regional officials can use when conducting their
annual performance evaluations of state DWSRF programs. However, officials
in 7 of the 10 regions said that they used the system either on a very
limited basis or never used it at all, primarily because more timely
information was readily available from other sources. EPA headquarters
officials pointed out that NIMS is relatively new; the initial data
collection took place during the late summer of 2000 and the final data were
not available for oversight purposes until November 2000. The officials said
that they would now start working with regional officials to make greater
use of the information system in their annual state performance evaluations.
In April 2001, DWSRF program managers at EPA headquarters drafted financial
management and other measures that rely on NIMS data to track the progress
of the program. The financial management measures address the following
aspects of state DWSRF programs:
* progress in committing funds to projects (such as loan assistance as a
percentage of funds available);
* pace of construction (such as disbursements as a percentage of assistance
provided); and
* the extent that DWSRF moneys are being recycled (such as principal
repayments as a percentage of assistance provided).
The success of this effort, however, hinges on the regional offices making
greater use of NIMS. In addition, the agency is currently using the draft
measures for internal management purposes only. However, until these
measures are consistently applied during performance reviews of state DWSRF
programs, their utility as an oversight tool cannot be assessed.
Furthermore, by limiting these measures to internal use, they cannot be used
by others outside EPA to assess the program's overall effectiveness.
EPA's Annual Evaluations According to EPA officials, in addition to the
regular day-to-day contacts of State DWSRF Programs with state DWSRF staff,
the annual program evaluation reviews of state Are Not Timely or DWSRF
programs serve as one of the agency's principal oversight tools. Consistent
Among other things, the objectives of the annual review are to evaluate
(1) a state's success in achieving the goals and objectives outlined in its
intended use plan and other reports submitted to EPA; (2) how well a
state's DWSRF program is achieving the intent of applicable statutory
provisions, such as funding projects in accordance with identified
priorities;25 (3) a state's compliance with the conditions of its
capitalization grant agreements; and (4) the financial status of a state's
DWSRF. However, we found that many reviews were not timely or consistent in
terms of their scope or documentation.
EPA's regional offices are responsible for conducting annual reviews of
state DWSRF programs. According to EPA's guidance, such reviews should (1)
include an on-site visit to meet with state program managers and review
pertinent records and a written report to document the results of the review
and (2) culminate in a written report. The guidance also states that the
reviews should take place within "a reasonable time period" following
receipt of a state's biennial report.26 While there is no definitive
requirement for the timing of the annual reviews, EPA program managers said
that the regional offices are expected to prepare a report documenting the
results of the review within 90 days of the site visit to a state.
To evaluate the timeliness of EPA's state performance evaluations, we
focused on two key elements: (1) the preparation of final reports within 90
days of the site visits and (2) the requirement that reviews be conducted
annually. We found the following:
* Of the 47 states for which the EPA regional offices had prepared reports
on their annual reviews, 60 percent of the reports were issued late, and
EPA's regional offices exceeded the 90-day time limit by about 4 months, on
average. In six states, the reports were over 9 months late. Limited
staffing is one of the major reasons that the reports are not completed on
time, according to regional officials. In addition, officials from three EPA
regions told us that the reports were delayed to allow time for concerns
discovered during on-site reviews to be resolved with the states.
25Under the 1996 amendments, states must give priority, to the maximum
extent practicable, to funding projects that (1) address the most serious
risk to human health, (2) are necessary to ensure compliance with the
requirements of the Safe Drinking Water Act, and (3) assist systems most in
need, on a per household basis, according to a state's affordability
criteria.
26This schedule applies in the years that a biennial report is due. EPA's
DWSRF guidance indicates that the review should be conducted on
approximately the same date in the "off years" when a biennial report is not
due.
* As of October 2001, EPA officials have not prepared evaluation reports for
New Jersey, Utah, or Wyoming. In New Jersey, EPA officials said that
regional officials visited the state every 6 months and covered many of the
elements that would otherwise be addressed in a formal review. In Utah and
Wyoming, regional officials made site visits to conduct the annual reviews
during July and December 1999, respectively, but never issued reports. EPA
headquarters officials told us that regional officials did not issue a
report for Utah's program and instead issued a Notice of Noncompliance,
which covered the deficiencies identified during the review.27 In the case
of Wyoming, regional officials said that they wanted to conduct a second,
follow-up review before issuing a final report, but had encountered
scheduling difficulties over the past 22 months.
* In 10 states, EPA regional officials did not issue PER reports during
calendar year 2000, although reporting was resumed the following year. In 11
more states, the most recent performance evaluation reports were issued more
than a year ago and, as of October 1, 2001, they were late by about 9
months, on average. According to several EPA regional officials, they did
not prepare evaluation reports on an annual basis because of staffing
constraints.
* Although the reporting has not been timely, EPA has conducted annual,
on-site reviews in most states. We found four states-Alaska, Michigan,
Oregon, and Wyoming-that have not received an on-site performance evaluation
within a year of the previous one. As of October 1, 2001, the time elapsed
since the last review in these states ranged from 15 to 30 months.
In conducting a content analysis of the 47 available PER reports, we found
inconsistencies in their scope and documentation. According to EPA-issued
guidance to assist its regional offices,28 an annual review should consider
the legal, managerial, technical, financial, and operational capabilities of
the applicable state agency to effectively administer the DWSRF. The
guidance states that the regional offices should evaluate state adherence to
17 certifications and assurances that are required of a state to receive a
capitalization grant. For example, regional officials are
27Two problems identified in the Notice of Noncompliance were slow progress
in committing loan funds and inadequate staffing levels. EPA headquarters
officials told us a visit was made during 2000, and a draft PER was provided
to the state in April 2001. Officials say that the problems have now been
resolved, but the draft has not been finalized, based on a management
decision.
28Annual Review Guide Drinking Water State Revolving Fund, U.S.
Environmental Protection Agency, March 1999.
expected to check that the state has provided adequate personnel and other
resources to effectively operate and manage the program, met matching
requirements, and complied with applicable laws and regulations. In addition
to these federal program assurances, the guidance calls for an evaluation of
other aspects of a state's DWSRF program during an annual review. For
example, in terms of general program management, regional officials should
assess the eligibility of the DWSRF assistance as it pertains to the
recipients, types of projects, and types of financial assistance provided.
Similarly, within the general category of financial management, regional
officials are expected to check on the adequacy of the financial statements
and internal controls, the timeliness of deposits into appropriate fund
accounts, the use of funds for set-aside purposes, and other items.
In total, the guidance identifies about 50 specific elements that should be
covered in an annual review. EPA recognizes that every element does not
require an in-depth review each year and gives its regional offices the
flexibility to tailor their reviews as appropriate. Specifically, the
guidance states: "Each year the review may be targeted toward specific
program aspects that have not previously or recently been reviewed in-depth
or have proven to be problematic in the past. This will allow the region to
concentrate its efforts on program aspects that require attention."29 In
terms of documenting the annual reviews, EPA's guidance states that, at a
minimum, the reports should include sections on purpose, background, scope,
observations, and recommendations.
One of the major problems we identified in reviewing EPA's performance
evaluation reports was that they often had no clear or specific description
of what was and was not covered in the annual review. For example, in 15
reports, the scope of the review was reported only in terms of a state
fiscal year and a list of the project files reviewed. Another 15 reports
described the scope in very general terms and noted only the broadest
categories of review, such as "financial management."30 As a result of the
inadequate scope descriptions and wide variation in the level of detail with
which regional officials summarized their observations, we often could not
determine what was covered in the review or what regional officials
29Annual Review Guide Drinking Water State Revolving Fund, p.12.
30Although we found a total of 29 reports that described the scope in very
general terms, 14 of these reports used a checklist approach or organized
the report in such a way that its users could infer which specific program
elements were covered in the annual review.
concluded about each aspect. More specifically, when the reports were silent
regarding certain program elements, we could not determine whether the
reason was that the elements were reviewed and found to be satisfactory or
not reviewed at all.
EPA officials from headquarters and regional offices offered a variety of
explanations for the inconsistencies in the documentation of the state
performance evaluations. For example, some officials viewed the program
evaluation reports principally as a tool to assist the states, rather than
as a means of helping EPA to evaluate overall program effectiveness. These
officials told us that it is unnecessary for the written reports to contain
detailed information because the findings are conveyed to the states orally.
Officials from some regional offices indicated their reluctance to include
concerns in a written report if the concerns had already been brought to the
attention of the state and resolved. We also heard that staffing and time
constraints hampered the ability of regional staff to document their reviews
more thoroughly and, in some instances, this meant reporting findings on an
exception basis. However, using the latter approach when the scope of the
review is unclear makes it impossible to determine whether some program
elements were reviewed and found to be satisfactory or simply not reviewed.
A key DWSRF program manager at EPA headquarters generally concurred with our
observations, noting that one of the agency's areas of concern has been the
timeliness and quality of the regions' annual reviews and the resultant
performance evaluation reports. In May 2001, the managers developed a
regional review strategy for annually reviewing the regional offices'
performance in implementing their oversight responsibilities.31 Among other
things, these reviews would cover the (1) documentation of regional
observations, findings, and general oversight activities; (2) adequacy of
staffing and resource allocations for regional oversight; and (3) adequacy
of annual reviews of state DWSRF programs, including an assessment of the
timeliness and completeness of the region's performance evaluation reports.
While initiating the regional reviews is a positive step, other actions may
be warranted to improve the usefulness of the annual state reviews both in
assisting the states and as a tool for evaluating overall program
effectiveness. At this time, EPA has no centralized system for tracking the
timeliness of the annual reviews or
31As of October 2001, headquarters officials had completed their reviews and
issued draft reports for 2 of the 10 regional offices.
performance evaluation reports by its regional offices, identifying common
or recurring problems among the states, or monitoring the status of their
corrective actions.
Gaps in Audit Coverage Limit EPA's Ability to Assess State Programs'
Financial Condition
In accordance with the 1996 amendments to the Safe Drinking Water Act, EPA's
implementing regulations contain provisions directed to "ensure the
financial integrity of the DWSRF program." Under the amendments, for
example, EPA was required to periodically audit the states' DWSRF funds. In
addition, EPA was required to publish guidance and regulations to ensure,
among other things, that the states (1) commit and expend funds as
efficiently as possible and (2) use accounting, audit, and fiscal procedures
that conform to generally accepted accounting principles. EPA's regulations
further provide that states may voluntarily agree to conduct annual
independent audits that cover financial statements, internal controls, and
compliance with applicable requirements. States that do not conduct their
own audits are subject to periodic audits by OIG. EPA's regulations also
specify that states provide detailed financial statements presenting the
financial status of the DWSRF in their biennial reports to EPA.
EPA relies primarily on its OIG to assess the adequacy of the DWSRF
program's financial controls. To facilitate the process, officials from
EPA's program offices and OIG developed an audit strategy for the DWSRF
program.32 According to our discussions with these officials, the key
elements of the DWSRF audit strategy are
* conducting audits in states that did not perform their own;
* reviewing the quality of the independent audits done by the states; and
* developing OIG guidance for the conduct of DWSRF audits.
As of September 2001, EPA has yet to fully implement its audit strategy.
First, the Inspector General did not audit the eight states that (1) had not
voluntarily agreed to conduct an independent audit or (2) did not have a
32In November 1996, after a year of discussions with EPA's Office of Water
and Office of Wastewater Management, the Inspector General and the program
offices reached agreement on an audit strategy for the Clean Water State
Revolving Fund Program. Following the authorization of a DWSRF and
discussions with EPA's Office of Ground Water and Drinking Water and others,
the audit strategy was revised to include the DWSRF program about a year
later.
Single Audit that was considered the equivalent of an independent audit.33
Second, the Inspector General reviewed the audit quality of only 7 of the 24
audits submitted by states for fiscal year 2000. Finally, the Inspector
General has not issued guidance on conducting DWSRF audits; officials from
EPA's regional offices believe such guidance would benefit them as well as
the states.
The Inspector General is now in the process of scheduling audits in states
where no audit has been conducted; the first is underway in the state of
Washington, and EPA plans to issue its final report on that state in
February 2002. Inspector General officials told us that they prioritize the
states to be audited according to the resources available to conduct the
audits and the Inspector General's experience with the states in question.
They also consider other criteria, including the amount of time that has
elapsed since the state's Clean Water State Revolving Fund was audited and
whether the Clean Water and Drinking Water funds are managed by the same
state agency.
Both EPA and OIG officials told us that auditing states where DWSRF programs
had never been audited any sooner would not have been cost-effective because
of the relatively low level of the loan activity in the states' DWSRF
programs during its early years. In addition, the Inspector General's
Western Audit Division, which is responsible for conducting and reviewing
audits in both the Clean Water State Revolving Fund and DWSRF programs, has
only four staff to devote to this effort. OIG officials told us that because
the Clean Water funds have been in existence much longer, and are much
larger, than their DWSRF counterparts, they take priority as a result.
In an effort to track the status of independent audits of states' DWSRF
programs, an OIG official recently developed a spreadsheet to collect
information on (1) when the audit reports were submitted and (2) the scope
of the audit reports. Specifically, the spreadsheet was designed to track
whether the audits covered the elements that, according to EPA's
regulations, should be included:
33Ten states have not completed an independent audit: Hawaii, Missouri,
Nevada, New Hampshire, Oregon, South Carolina, Tennessee, Texas, Utah, and
Washington. According to EPA officials, however, Hawaii is now in the
process of conducting its first independent audit. In addition, Inspector
General officials determined that the financial review done in conjunction
with the Single Audit Act in Texas was sufficiently detailed to make it an
acceptable substitute for an independent audit.
* an auditor's opinion on the DWSRF program financial statements;
* reports on internal controls; and
* reports on compliance with applicable statutory, regulatory, and general
grant requirements.
The spreadsheet lists audit reports for 32 states, of which 24 covered
fiscal year 2000, 7 covered fiscal year 1999, and 1 covered fiscal year
1998. Table 3 provides a summary of the spreadsheet data.
Table 3: Scope of Independent Audit Reports Submitted to Inspector General
Status as determined by Inspector General
Key elements of independent audit OK No or none Disclaimer Marginal Total
Financial statements 31 1
Internal controls 28 3 1
Compliance 20 3 9
Legend:
"OK" means that the auditor's opinion on the financial statements or the
auditor's report on internal controls was adequate or that the auditor's
report contained an opinion on compliance.
"No or none" means that the auditor did not provide an opinion on internal
controls or compliance.
"Disclaimer" means that the auditor's report contained a disclaimer stating
that compliance was not an objective of the audit.
"Marginal" means that auditor's opinion or report did not contain enough
information and was, therefore, marginally acceptable.
Source: EPA's Office of Inspector General.
Based on data contained in the OIG spreadsheet, some of the independent
audits were limited in scope or less than adequate in reporting on some of
the elements. For example, three states did not provide a report on internal
controls or compliance.
In addition to checking the extent that the 32 state audit reports covered
the three elements described in EPA's regulations, OIG officials conducted a
more detailed review for 10 of these reports for audit quality.34 OIG
officials told us that although it would be desirable to check more reports
for audit quality, checking audit quality was a lesser priority than getting
states to voluntarily conduct independent audits and making sure that these
audits covered the elements.
34Over the past 8 to 10 months, OIG officials reviewed seven audit reports
covering state fiscal year 2000, two covering state fiscal year 1999, and
one for state fiscal year 1998.
DWSRF program and OIG officials acknowledge that EPA does not have a process
for ensuring that (1) the state and the cognizant regional officials are
informed of any concerns about audit coverage or quality or (2) corrective
action is taken. Such coordination between program and OIG officials is
necessary because, according to program officials, they do not
systematically monitor the status of the states' independent audits. DWSRF
program officials noted that resource constraints limit their ability to
review the audits themselves, and as a result, they increasingly rely on the
OIG to review audits and assess their quality. For example, one regional
official we interviewed reported having no available financial staff to
review state DWSRF programs, and an official from another region stated that
budgetary constraints limited the amount of time he could spend reviewing
DWSRF financial documents.
The Inspector General has not developed guidance for the conduct of DWSRF
audits. Officials from several of the regional offices we contacted told us
that such guidance would be beneficial to DWSRF program auditors. However,
according to one OIG official, the development of such guidance has been
delayed until the office can incorporate any insights it gains from
conducting its own audits at the states-audits which are now just in the
planning stages. Although the OIG originally scheduled the DWSRF audit
guidance to be completed in fiscal year 2001, it now expects to have the
guidance available for the states and other interested parties during fiscal
year 2002. In the meantime, OIG officials noted that other guidance is
available, such as the Inspector General's Comprehensive Audit Guide for the
Clean Water State Revolving Fund, the OMB Circular A-133 compliance
supplement,35 and model DWSRF financial audit statements.
In addition to guidance, better coordination and information sharing are
needed between the DWSRF program office and OIG staff. Officials from four
regional offices told us that they were unaware of the Inspector General's
planned audit schedule and, in one instance, expressed concern that they had
not been consulted about which states should receive priority. In addition,
although we found some indications that either
35The OMB Circular A-133 (issued pursuant to the Single Audit Act, P.L.
98-502, and the Single Audit Act Amendments of 1996, P.L. 104-156) sets
forth standards for obtaining consistency and uniformity among federal
agencies for the audit of states, local governments, and non-profit
organizations expending federal awards. A compliance supplement was issued
to this circular in March 2000 to address specific DWSRF reporting
requirements.
headquarters or regional officials had requested assistance from the
Inspector General as a result of problems or concerns identified during
annual reviews, OIG officials did not receive copies of the regional
performance evaluation reports on a regular basis. These reports sometimes
contain indications of problem areas, such as poor cash management or
inadequate staffing levels, which could be useful in helping the Inspector
General to identify and prioritize candidates for closer scrutiny, such as
checking the quality of states' independent audits. Similarly, although the
OIG spreadsheet on the status of state audits was intended only for internal
use, regional officials might have benefited from knowing about gaps in
audit coverage or other limitations when they prioritized, and determined
the scope of, state performance evaluations.
Conclusions
EPA has laid the groundwork for its DWSRF program. It must now safeguard
program funds through prudent oversight and good management to ensure the
long-term viability of the DWSRF program and the availability of this major
source of infrastructure financing for generations to come.
EPA's estimate of the nation's drinking water infrastructure needs has
far-reaching implications. First, it influences the level of congressional
appropriations for the DWSRF program. Second and more importantly, EPA uses
this estimate to guide the agency's annual allocation of DWSRF funds to the
states. Although EPA has taken steps to validate the data to instill
confidence in the estimate and its subsequent allotments to the states, the
precision of the estimate is unknown. Until EPA calculates and reports the
level of precision in its needs assessment survey it does not know how close
the estimate comes to reflecting the nation's true needs.
Measuring the overall effectiveness of a program as complex as the DWSRF is
not an enviable task. EPA has an opportunity while the program is maturing
to use the oversight tools at its disposal to diagnose the program's overall
health and prescribe remedies as needed. However, EPA is not making the most
out of these tools. Without finalizing and applying its financial management
measures, bringing greater consistency to its annual review process, and
monitoring audit coverage and quality, EPA does not have all the information
it needs to monitor the states' implementation of the program or assess the
program's overall effectiveness.
Recommendations for Executive Action
To get a better sense of the accuracy of EPA's estimate, we are recommending
that EPA calculate and report the level of precision actually achieved in
its recent needs assessment, and determine what implications, if any, its
findings have on the way future needs assessment surveys are conducted.
To improve EPA's oversight of the DWSRF program and its ability to assess
overall program effectiveness, we recommend that the EPA Administrator take
the following steps:
* finalize and consistently apply financial management and other program
measures to assist in the annual review of state performance and make them
available outside EPA, so that others can assess the overall effectiveness
of the program;
* improve the timeliness of and require greater consistency in the scope and
documentation of the annual program evaluations, so that the results of the
evaluations can be systematically reviewed to identify broad-based problems
that may require national solutions;
* conduct independent audits in the states where no audits have been done,
track and evaluate the quality of audits performed by others, and complete
financial audit guidelines for the DWSRF program; and
* facilitate the exchange of audit findings and program evaluation results
between DWSRF program and OIG officials.
Agency Comments
We provided a draft of this report to EPA for its review and comment. EPA's
Office of Water and Office of Inspector General provided comments, which we
have included in appendixes III and IV of this report, respectively.
Overall, EPA agreed with our findings and recommendations. Although EPA
indicated that it would revisit the issue of calculating actual precision
levels in the design of its 2003 survey, our recommendation called for more
specific action. Namely, we recommended that EPA calculate and report the
level of precision for its 1999 needs assessment and determine the
implications, if any, it has on how the 2003 survey is conducted. Knowing
the level of precision actually achieved will help EPA and other users of
the needs assessment get a sense of how closely the estimate reflects actual
needs. EPA also provided technical clarifications, which we incorporated, as
appropriate.
Scope and Methodology
To conduct our work, we interviewed officials in EPA's Office of Ground
Water and Drinking Water and Office of Wastewater Management where we
obtained and reviewed relevant legislation, regulations, guidance, reports,
and other documents. We also interviewed DWSRF officials in each of EPA's 10
regional offices and officials from the Office of the Inspector General at
EPA headquarters and offices in Sacramento and San Francisco, California,
and in Denver, Colorado. Finally, we conducted a nationwide survey of key
drinking water officials in the 50 states.
To address the first objective, we conducted interviews with officials in
EPA's Office of Ground Water and Drinking Water and their technical advisers
about EPA's needs assessment survey, the particular methodologies used to
estimate the cost of needed drinking water facility improvements over the
next 20 years, and how those estimates were used to allot moneys to the
states. We reviewed available documentation on the statistical sampling and
estimation methods used in the EPA survey as well as the documentation
describing EPA's data collection and quality control procedures. We also
developed and conducted a survey of all 50 states' drinking water officials
to ascertain the magnitude of the disadvantaged community need and the
extent to which states were using the DWSRF program to address that need. We
obtained responses from all 50 states. As part of our survey of state
officials, we asked officials to indicate whether each of the small systems
in EPA's needs assessment sample qualified as a disadvantaged system. We
used this information to estimate the number of disadvantaged small systems
in the 50 states. (See app. I.)36
To examine EPA's efforts to evaluate program effectiveness, we obtained
information on the data elements and standard reports within EPA's national
information management system for the DWSRF program and interviewed
headquarters and regional officials regarding their use of the system and
its limitations. To assess the timeliness of the annual review process, we
obtained information on the submission dates for the states' biennial
reports, the dates that regional offices conducted annual reviews
36In developing our estimate, we used the weights assigned by EPA to each of
the systems included in its needs assessment sample. We did not
independently verify the accuracy of these weights. The weight assigned to a
system indicated the number of small systems nationwide that the system
represented. Thus, the sum of the weights of all sampled systems represents
all small systems in the 50 states. Similarly, by totaling the weights
assigned to the sampled systems that the states identified as being
disadvantaged, we could develop an estimate of the number of disadvantaged
systems among the 24,342 systems represented by the responses to our survey.
of state DWSRF performance, and the dates that the evaluation reports were
issued. We reviewed EPA's guidance on the annual review process, along with
the most recently completed performance evaluation report for each state,
and evaluated the scope and content of the reports relative to EPA's
guidance. We obtained the views of headquarters and regional DWSRF officials
on the purpose of the annual review process and the evaluation reports and
the reasons for differences in the timing, scope, and documentation of the
reviews. To examine EPA's strategy for ensuring the financial integrity of
the DWSRF program, we interviewed EPA program and Inspector General
officials about their roles and responsibilities. We also obtained
information on the Inspector General's efforts to monitor the quality of the
states' independent audits and to conduct audits in the states that lacked
audits of their own. Finally, we reviewed excerpts from EPA's Strategic Plan
as well as annual performance measures developed for the DWSRF program to
assess the agency's use of results-oriented performance measures.
We conducted this review from October 2000 through November 2001 in
accordance with generally accepted government auditing standards.
As we agreed with your office, unless you announce its contents earlier, we
plan no further distribution of the report until 30 days from the date of
this letter. We will then send copies to the EPA Administrator and make
copies available to others who request them.
If you, or your staff, have questions about this report, please call me on
(202) 512-3841. Contributors to this report are listed in appendix V.
John B. Stephenson Director, Natural Resources and Environment
Appendix I: Efforts to Determine the Universe of Water Systems Eligible for
DWSRF Disadvantaged Assistance
Because providing additional loan subsidies to disadvantaged communities can
affect the extent that states' revolving funds are replenished, we were
interested in finding out what proportion of the nation's community water
systems qualified as disadvantaged communities and would thus be eligible to
receive special assistance. EPA officials told us that they had never tried
to estimate the number of water systems that qualified for such assistance.
Furthermore, only 3 of the 50 states responding to our survey made attempts
to develop such estimates. As part of our review, we tried to use EPA's
needs assessment-and its statistical sample of small water systems in
particular-as a vehicle for estimating the number of systems that were
potentially eligible.
As part of a 50-state survey on DWSRF assistance for disadvantaged
communities,1 we asked the states with disadvantaged community programs to
report whether they had estimated the number of water systems that would
meet state-established criteria for a disadvantaged community. According to
our summary of their responses, only 3 of the 31 states with programs made
some attempt to develop such estimates, while the remaining 28 had not. When
asked why they had not estimated the number of disadvantaged communities, 18
states reported that they did not have the data needed to determine whether
particular systems meet the disadvantaged criteria until they actually
applied for DWSRF assistance. Under EPA regulations, states may provide
assistance to communities that meet the state's definition of
"disadvantaged" or which the state expects to qualify as disadvantaged as a
result of the project. Thus, while the number of systems that currently meet
a state's definition might be relatively easy to estimate, determining the
number of additional systems that would fall into the disadvantaged category
because of the high cost of a project, for example, would require a
case-by-case analysis. Other reasons that states gave for not developing an
estimate included insufficient resources (five states) and the fact that
getting such information was not a need or priority for the state (five
states).
Two of the three states that had estimated the number of their disadvantaged
systems generally did so by using a shortcut method designed to project the
magnitude of need. For example, Kentucky reached its estimate that about 320
systems, or 43 percent of the community water systems in the state, could be
considered disadvantaged
1 A copy of the questionnaire with a summary of the states' responses is
included in appendix II.
Appendix I: Efforts to Determine the Universe of Water Systems Eligible for
DWSRF Disadvantaged Assistance
by comparing water rates as a percentage of median household income.
However, according to state officials, the data on water rates were about 5
years old. New Mexico came up with a rough estimate of 500-about 63 percent
of the state's 795 community water systems-on the basis of the percentage of
disadvantaged systems that had already applied for DWSRF assistance. Utah
was the only state to develop an estimate by applying its own criteria for
disadvantaged communities.2 The state determined that 112 communities, or
about 25 percent of the state's 449 community water systems, would qualify
for the additional subsidies available to the disadvantaged.
In an effort to develop our own national estimate of the number of
disadvantaged communities, we started with same statistical sample of small
water systems that EPA had selected for its infrastructure needs assessment
because, according to EPA officials, the vast majority of systems serving
disadvantaged communities are likely to be small systems.3 (Among other
problems, small water systems often lack the economies of scale that make
infrastructure projects more affordable at larger systems.) In addition,
having the statistical sample meant that we would be able to project the
results to the universe of small systems and obtain a national estimate.
As part of our 50-state questionnaire, we identified the specific systems
included in EPA's sample-from 5 to 34 systems in each state-and asked the
states to determine which ones they would consider to be disadvantaged
communities. When states were able to apply their own criteria, we asked
them to determine whether each system initially qualified as disadvantaged
or became disadvantaged as a result of the additional costs needed to
improve it. States without specific criteria-or states with criteria that
did not apply-were asked to use GAO surrogate criteria.4
2To be considered "disadvantaged" in Utah, a community's median adjusted
gross income must be equal to or less than 80 percent of the state's median
adjusted gross income.
3In total, 591 of the systems in EPA's sample were located in the 50 states.
The others were in Puerto Rico and the U.S. Virgin Islands.
4For the purpose of this analysis, we established surrogate criteria; to
qualify as "disadvantaged," a community's water rates would have to exceed
1.4 percent of its median household income.
Appendix I: Efforts to Determine the Universe of Water Systems Eligible for
DWSRF Disadvantaged Assistance
In total, we obtained information on a portion of EPA's sample representing
24,334 systems, or nearly 55 percent of the 44,373 small community water
systems in the United States. On the basis of EPA's sample and the states'
determinations, we estimated that 6,925 systems, or about 28 percent of the
24,334 small systems reflected in the results of our survey, qualified as
"disadvantaged."5 However, the high non-response rate associated with this
analysis precluded us from obtaining information on the systems representing
the remaining 45 percent of the universe. As a result, we could not
determine whether the actual percentage of systems that would qualify as
disadvantaged matched our findings. Specifically, we had no way of
determining whether the systems for which we had information were
systematically different from those systems for which we lacked information
in a way that would make the percentage of disadvantaged communities higher
or lower than what would be found in the universe as a whole.
Our effort met with limited success for several reasons. The primary reason
was that some states did not have the information necessary to readily make
a determination about a system's disadvantaged status or they lacked the
time and resources to collect the information for us. Also, as noted
earlier, EPA did not determine the level of uncertainty, or sampling error,
in its needs estimate. Because of EPA's sampling strategy, traditional
methods for estimating sampling error cannot be used, and developing an
accurate measure of the precision of any estimate for small systems would
prove challenging at best. As a result, we cannot draw any conclusions about
the precision of our estimate of water systems that qualify for assistance
to disadvantaged communities.6
5Another way of looking at this is to compare the number of systems
estimated to be disadvantaged (6,925) with the total number of small systems
(44,373). Using this approach, we could conclude that the minimum percentage
of "disadvantaged" systems would be about 16 percent.
6EPA's requirement that systems from every state, Puerto Rico, and the U.S.
Virgin Islands be included in its sample of small water systems complicated
the calculation of the sampling error in the needs estimate for these
systems. For example, to use the appropriate statistical formulas for
calculating sampling error, EPA's sample would have to have included systems
from at least two geographical areas within each state or territory.
However, at least 10 states or territories had only one geographical area
from which systems were sampled. Although statisticians have developed a way
to approximate sampling error when this situation occurs, using it requires
each state with only one geographical area to be grouped with a "similar"
state. Thus, assumptions must be made about which states are similar, and
criteria for making such assumptions were not readily available.
Appendix II: GAO's Survey of State Drinking Water Officials Regarding
Assistance to Disadvantaged Communities
Appendix II: GAO's Survey of State Drinking Water Officials Regarding
Assistance to Disadvantaged Communities Appendix II: GAO's Survey of State
Drinking Water Officials Regarding Assistance to Disadvantaged Communities
Appendix II: GAO's Survey of State Drinking Water Officials Regarding
Assistance to Disadvantaged Communities Appendix II: GAO's Survey of State
Drinking Water Officials Regarding Assistance to Disadvantaged Communities
Appendix III: Comments from EPA's Office of Water
Appendix III: Comments from EPA's Office of Water
Appendix IV: Comments from EPA's Office of Inspector General
Appendix V: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
(360001)
Ellen M. Crocker (617) 565-7469
Karen Kemper, John Johnson, Lynn Wasielewski, Emma Quach, Karen Bracey,
Teruni Rosengren, Anna Kelley, Luann Moy, Jonathan McMurray, and Karen
Keegan made key contributions to this report.
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