Clean Water Act: State Revolving Fund Loans to Improve Water Quality
(Letter Report, 12/31/96, GAO/RCED-97-19).

Congress authorized the creation of state revolving funds in 1987 to
help local governments and others build projects that would improve
water quality. The federal government provides annual grants to the
states as "seed money" to help capitalize their revolving loan funds.
The states use their revolving funds to make loans to local governments
and others; as the loans are repaid, the fund is replenished, and more
loans can be made. All 50 states and Puerto Rico have set up state
revolving funds, and through fiscal year 1996, Congress had provided
more than $11 billion to those revolving funds. GAO surveyed nine states
with revolving fund programs--Arizona, Florida, Illinois, Louisiana,
Maryland, Missouri, Oregon, Pennsylvania, and Texas. This report
provides information on (1) the amount of funds lent and the percentage
of available funds lent as of the end of each state's fiscal year 1996
and (2) the factors at the federal and state levels that constrained the
amount and percentage of funds lent.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-19
     TITLE:  Clean Water Act: State Revolving Fund Loans to Improve 
             Water Quality
      DATE:  12/31/96
   SUBJECT:  Grants to states
             Loans to localities
             State-administered programs
             Capital
             Revolving funds
             Wastewater treatment
             Intergovernmental fiscal relations
             Water pollution control
IDENTIFIER:  EPA Clean Water State Revolving Fund Program
             EPA Construction Grants Program
             Arizona
             Florida
             Illinois
             Louisiana
             Maryland
             Missouri
             Oregon
             Pennsylvania
             Texas
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on VA, HUD, and Independent
Agencies, Committee on Appropriations, House of Representatives

December 1996

CLEAN WATER ACT - STATE REVOLVING
FUND LOANS TO IMPROVE WATER
QUALITY

GAO/RCED-97-19

Clean Water Act

(160354)


Abbreviations
=============================================================== ABBREV

  EPA - Environmental Protection Agency
  GAO - General Accounting Office
  SRF - state revolving fund

Letter
=============================================================== LETTER


B-275459

December 31, 1996

The Honorable Jerry Lewis
Chairman, Subcommittee on VA, HUD,
 and Independent Agencies
Committee on Appropriations
House of Representatives

Dear Mr.  Chairman: 

To help local governments and others construct projects to improve
water quality and thereby help safeguard public health and the
environment, in 1987 the Congress authorized the creation of state
revolving funds.\1 Through the Clean Water State Revolving Fund
Program, the federal government provides annual grants to the states
as "seed money" to help capitalize their revolving loan funds.  The
states use their revolving funds to make loans to local governments
and others; as the loans are repaid, the fund is replenished, and
additional loans can be made.  All 50 states and Puerto Rico have
established state revolving funds, and through fiscal year 1996, the
Congress had provided more than $11 billion to their revolving funds. 

You asked us to collect detailed information on selected states' use
of their revolving funds.  To accomplish this task, we surveyed nine
states with state revolving fund programs--Arizona, Florida,
Illinois, Louisiana, Maryland, Missouri, Oregon, Pennsylvania, and
Texas.  We selected these states because they provide diversity in
terms of the size of their programs and other factors, such as
geographic location. 

Specifically, for the nine states surveyed, we provide information on
the amount of funds lent and the percentage of available funds lent,
as of the end of each state's fiscal year 1996.\2 In addition, we
provide information on factors at the federal and state levels that
constrained the amount and percentage of funds lent.  The information
in this report supplements preliminary information that we provided
to you in April 1996.\3


--------------------
\1 The program was established in the 1987 amendments to the Federal
Water Pollution Control Act, also known as the Clean Water Act.  It
was authorized through 1994.  Since then, the Congress has continued
to fund the program with annual appropriations. 

\2 In this report, the data cited are as of the end of the applicable
state's fiscal year or the federal fiscal year, as appropriate.  In
seven of the nine states, the state fiscal year ends on June 30; in
Texas, it ends on August 31; and in Florida, it ends on September 30,
which is also the end of the federal fiscal year. 

\3 See Clean Water Act:  Use of State Revolving Funds Varies
(GAO/T-RCED-96-140, Apr.  16, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The nine states increased the total amount of funds they lent from
$3.3 billion in 1995 to $4.0 billion in 1996.  Moreover, all nine
states increased the amounts they lent.  Six states achieved an
increase of between 15 and 29 percent, and the other three states
achieved an increase of 30 percent or more.  Also, seven of the nine
states increased the percentage of available funds they lent.  Of
these seven, three states increased this proportion by 17 percentage
points or more.  Nevertheless, the percentage of funds lent as of the
end of 1996 varied substantially among the nine states. 
Specifically, five states had lent 80 percent or more of their
available funds, three states had lent between 70 and 79 percent, and
one state had lent 60 percent. 

In eight of the nine states, officials identified the expiration of
the authorizing legislation, as well as federal requirements, as
affecting the amount and percentage of funds lent.  For example,
officials in seven states said that the legislation's expiration
created uncertainty about the loan conditions that might apply in the
future and caused some communities to postpone seeking or accepting
loans.  Also, officials in seven states said that other federal
requirements--such as a prevailing-wage provision--discouraged some
communities from seeking loans.  In two states, officials said that
the decisions made by the state programs constrained lending.  For
example, program managers in one state decided to finance certain
wastewater projects from state funds rather than from the revolving
fund, thereby limiting both the amount and the percentage of funds
lent from the revolving fund.  In the other state, efforts to
publicize the program to local officials were not effective in the
early years of the program. 


   BACKGROUND
------------------------------------------------------------ Letter :2

In 1972, the Congress established the Construction Grants Program to
provide grants to help local governments construct wastewater
treatment facilities.  These federal grants provided most of the
funding for these projects; the remainder was provided by the local
government constructing the project.  In 1987, the Congress began to
phase out that program and authorized the creation of state revolving
funds (SRF), which provide loans to local governments and others. 

The states are required to match SRF capitalization grants at a rate
of at least one state dollar for every five federal dollars.  The
states have the option of increasing the amount of SRF funds
available to lend by issuing bonds guaranteed by the money in the
SRFs.  According to a national survey, as of June 30, 1995 (the
latest data available), the states collectively had $18.9 billion in
their SRF accounts; over one-half of this amount (approximately $11
billion) was provided by federal capitalization grants.\4 (App.  I
provides additional information on funding sources for the nine
SRFs.)

For the most part, the Congress gave the states flexibility to
develop SRF loan assistance programs that meet their particular
needs.  However, the states must ensure that the projects funded with
loans issued up to the amount of the federal capitalization grants
meet two types of federal requirements.  The first type of
requirement includes those requirements contained in the various
statutes that apply generally to federal grant programs.  These
requirements--also called "cross-cutting" authorities--promote
national policy goals, such as equal employment opportunity and
participation by minority-owned businesses.  The second type of
requirement applies various provisions that applied to the
Construction Grants Program (known as title II requirements, because
that program was authorized by title II of the Federal Water
Pollution Control Act Amendments of 1972).\5 These requirements
include compliance with the federal prevailing-wage requirement.\6
The title II requirements apply only to those projects wholly or
partially built before fiscal year 1995 with funds made directly
available by federal capitalization grants. 

The transfer of federal funds to SRFs begins when the Congress
appropriates funds annually to the Environmental Protection Agency
(EPA).  EPA then allots capitalization grants to the individual
states, generally according to percentages specified in the Clean
Water Act.\7 To receive its allotment, a state has up to 2 years to
apply for its capitalization grant.  In order to apply, a state must,
among other things, propose a list of potential projects to solve
water quality problems and receive public comments on that list. 
After completing the list and receiving its capitalization grant, a
state generally has 2 years to receive payments of the grant amount
(via increases in its letter of credit).  After each such increase, a
state has up to 1 year to enter into binding commitments to fund
specific projects.  Next, a binding commitment is typically converted
into a loan agreement. 


--------------------
\4 Between 1992 and 1995, the Ohio Water Development Authority
annually surveyed all 50 states and Puerto Rico on certain aspects of
the SRF program.  See State Revolving Loan Fund Survey - 1995, Ohio
Water Development Authority, Council of Infrastructure Financing
Authorities Monograph No.  8, May 1996. 

\5 For a more detailed description of the cross-cutting and title II
requirements, see Water Pollution:  States' Progress in Developing
State Revolving Loan Fund Programs (GAO/RCED-91-87, Mar.  19, 1991). 

\6 Federal law requires that workers on covered projects be paid the
prevailing wage.  The prevailing wage is defined as the wage paid to
the majority of the workers in the job classification on similar
projects in the same geographic area.  For additional information on
issues related to prevailing-wage rates, see Davis-Bacon Act: 
Process Changes Could Raise Confidence That Wage Rates Are Based on
Accurate Data (GAO/HEHS-96-130, May 31, 1996). 

\7 The 1987 amendments specified percentages for the 50 states, the
District of Columbia, and seven other jurisdictions.  As some of
these other jurisdictions--such as Palau--have gained independence
since 1987, they lost their entitlement to SRF funds.  Their shares
of the funds are allocated among the states and other jurisdictions
that remain eligible for funds. 


   AMOUNT AND PERCENTAGE OF FUNDS
   LENT GENERALLY INCREASED
------------------------------------------------------------ Letter :3

The overall amount of funds lent by the nine states increased between
1995 and 1996, from $3.3 billion to $4.0 billion.  The amount lent by
each state also increased.  During the same time period, seven states
increased their percentage of funds lent, and two states maintained
or decreased their percentage of funds lent.\8

As figure 1 shows, all nine states increased the amount of funds they
lent between 1995 and 1996.  Six states increased their amount by 15
to 29 percent.  For example, Pennsylvania increased the amount lent
by 17 percent, from $267 million to $311 million.  The other three
states increased their amount of funds lent by 30 percent or more. 
The largest change--95 percent--was in Arizona, which increased from
$50 million to $99 million. 

   Figure 1:  Cumulative Amount of
   Funds Lent, 1995 and 1996, by
   State

   (See figure in printed
   edition.)

Note:  Figures were rounded to the nearest whole million. 

Source:  GAO's analysis of information provided by the states. 

As figure 2 shows, seven of the nine states increased their
percentage of funds lent between 1995 and 1996.  Three states
increased their percentage by 17 percentage points or more.  Four
other states increased their percentage by 2 to 9 percentage points. 
Finally, one state's percentage stayed the same, and another state's
percentage declined by 2 percentage points. 

   Figure 2:  Percentage of Funds
   Lent, 1995 and 1996, by State

   (See figure in printed
   edition.)

Note:  Figures were rounded to nearest whole percent. 

Source:  GAO's analysis of information provided by the states. 

Among the nine states, the percentage of funds lent at the end of
1996 ranged from 60 to 99 percent.  Specifically, five states lent 80
percent or more of their available funds, another three states lent
70 to 79 percent, and the final state lent 60 percent.  (App.  II
provides details on the amount and percentage of funds lent, by
state.)


--------------------
\8 It is possible for the amount of funds lent to increase, while the
percentage of funds lent decreases (or stays the same).  This
situation can occur when the increase in the amount of funds lent is
proportionately smaller than (or equal to) the increase in the
available funds. 


   LACK OF LEGISLATIVE
   REAUTHORIZATION AND OTHER
   FEDERAL-LEVEL FACTORS
   CONSTRAINED LENDING IN EIGHT
   STATES
------------------------------------------------------------ Letter :4

Officials in eight of the nine states cited one or more factors at
the federal level as affecting the amounts and percentages of funds
they lent.  In seven states, officials said that uncertainty about
the reauthorization of the SRF program discouraged some potential
borrowers.  Also, in seven states, officials cited a concern about
compliance with federal requirements, including possible increases in
project costs because of a federal prevailing-wage requirement. 
Finally, in three states, officials identified other reasons, such as
federal restrictions on the use of SRF funds. 


      EXPIRATION OF LEGISLATIVE
      AUTHORIZATION DISCOURAGED
      SOME POTENTIAL BORROWERS
---------------------------------------------------------- Letter :4.1

Officials in seven of the nine states said that the lack of
reauthorization of the Clean Water Act limited their success in
lending funds.  Among other things, the lack of reauthorization made
it difficult to assure the communities applying for loans that SRF
funds would be available to finance their projects and created
uncertainty among communities about the terms of their loans. 

Officials from the seven states generally agreed that the amount and
timing of federal funding became more uncertain after the SRF
program's authorization expired at the end of September 1994.  These
officials said that prior to 1994, they used the amounts in the
authorizing legislation to help determine how much money they would
have to lend each year.  According to these officials, these amounts
also helped reassure the communities that federal funding would be
available for projects.  These officials said that the uncertainty
created by the lack of reauthorization made it difficult for the
states to schedule projects and assure the communities applying for
loans that construction money would be available when needed. 

In addition, Pennsylvania officials said that the lack of
reauthorization caused some communities to delay accepting SRF loans
because they hoped for more favorable loan terms after the act was
reauthorized.  Specifically, the Congress has considered a proposal
to extend the maximum term for an SRF loan, in certain cases, from 20
years to as much as 40 years and to provide lower interest rates. 
The state officials said that the communities were interested in both
longer repayment periods and lower interest rates.\9

According to a Pennsylvania official, several communities in the
state had a loan approved by the state but had not formally accepted
the loan.  In three cases, local officials told us that they were
delaying further action pending the act's reauthorization; the total
dollar value of such loans was about $15 million.  The Pennsylvania
official told us that small, low-income communities in particular
would benefit from the proposal to lengthen the repayment period. 
For example, in March 1995 Pennsylvania approved a $3 million loan
for Burrell Township, which has approximately 3,000 people.  However,
as of October 1996, the community had not accepted the loan on the
chance that a reauthorized act would provide for a longer loan term
and thus lower annual repayments. 


--------------------
\9 In January 1992, we reported that the 20-year maximum term for SRF
loans posed particular problems for small communities.  We reported
that low-technology solutions, such as filtration ponds and lagoons,
which are often appropriate in small communities, generally have
design lives extending far beyond 20 years.  Limiting the loan term
increases the annual debt service payments and, hence, user charges
in communities that may not be able to afford higher charges.  See
Water Pollution:  State Revolving Funds Insufficient to Meet
Wastewater Treatment Needs (GAO/RCED-92-35, Jan.  27, 1992). 


      THE FEDERAL PREVAILING-WAGE
      REQUIREMENT DISCOURAGED
      POTENTIAL BORROWERS
---------------------------------------------------------- Letter :4.2

Officials in seven of the nine states said that compliance with the
federal requirements made financing projects with SRF funds less
attractive and, in some cases, caused communities to turn down SRF
loans.  In particular, five states raised concerns that a federal
prevailing-wage requirement could make SRF-financed projects more
expensive to construct than projects constructed with other funds. 
While the title II requirements--which include the federal
prevailing-wage requirement--ceased to apply to new projects after
October 1, 1994, state officials said they were concerned that these
requirements would be reinstated in the reauthorization act. 

For example, an Arizona official said that the prevailing-wage
requirement could inflate a project's costs from 5 to 25 percent.  A
Louisiana official said that the community of East Baton Rouge Parish
withdrew its 1990 SRF loan application for a project to serve about
120,000 people when it discovered that the prevailing-wage
requirement would increase the cost of labor for the project by more
than $1.1 million--31 percent. 

Louisiana officials said that before the prevailing-wage requirement
expired, the state had experienced difficulties in making loans
largely because local officials perceived the requirement as
increasing the costs of projects.  The officials said that
Louisiana's lending rate increased in part because the wage
requirement expired.  The state's lending rate was 44 percent at the
end of 1994, before the requirement expired; 62 percent at the end of
1995; and 79 percent at the end of 1996. 

EPA officials said they were aware that many states had a concern
about the prevailing-wage requirement.  They noted, however, that the
requirement expired at the end of September 1994 and that the
continued application of the requirement would be a state's
management decision.  They also noted that, even before the
requirement expired, it applied only to projects funded with federal
capitalization grants (as opposed to projects funded solely with
state matching or borrowed funds, for example).  Moreover, they noted
that some states have chosen to continue requiring projects to comply
with the requirement, even though they are no longer required to do
so; however, they said, both Arizona and Louisiana no longer apply
the requirement to the projects they fund. 


      OTHER FEDERAL-LEVEL FACTORS
      ALSO DISCOURAGED POTENTIAL
      BORROWERS
---------------------------------------------------------- Letter :4.3

Officials from three states identified other factors at the federal
level that constrained lending.  These included the awarding of
federal funds directly for selected communities and federal
restrictions on the use of SRF funds. 

Maryland and Pennsylvania officials said that the earmarking of
federal funds--not from the SRF program--for specific communities
raised the expectation in other communities that if they waited long
enough, they might also receive funds directly.  This expectation
reduced these communities' incentive to apply for an SRF loan. 

For example, a Maryland official said that state SRF lending was
limited by a congressional decision to provide federal funds directly
for a project in Baltimore, which SRF officials had expected to
finance.  He said that the City of Baltimore turned down the SRF loan
because it received $80 million in federal grant funds for the
project in 1993 and 1994.  The state official said that it took time
to find other communities to borrow the money that was originally set
aside for the Baltimore project.  The state increased its percentage
of funds lent from 61 percent at the end of 1995 to 70 percent at the
end of 1996. 

Officials from Missouri said that certain federal restrictions on the
use of SRF funds limit the amount of loans they can make.  For
example, a state official cited restrictions on financing the costs
of acquiring land.  Under the Clean Water Act, SRF loans cannot be
made to purchase land unless the land itself is an integral part of
the waste treatment processes.\10 Thus, wetlands used to filter
wastewater as part of the treatment process are an eligible expense
under the act.  However, other lands, such as the land upon which a
treatment plant would be built, are not eligible.  According to the
official, because purchasing land for a wastewater treatment facility
represents a large portion of the facility's cost but is ineligible
for SRF financing, some communities are discouraged from seeking SRF
loans. 


--------------------
\10 In January 1992, we reported that the ineligibility of certain
land costs for SRF assistance posed a financial problem for many
communities.  See Water Pollution:  State Revolving Funds
Insufficient to Meet Wastewater Treatment Needs (GAO/RCED-92-35, Jan. 
27, 1992). 


   STATES' MANAGEMENT DECISIONS
   LIMITED LENDING IN TWO STATES
------------------------------------------------------------ Letter :5

In Pennsylvania and Arizona, the amount of funds lent was limited by
decisions on how to manage the loan fund.  These decisions related to
how to use SRF funds in Pennsylvania and how to publicize the program
in Arizona. 

Pennsylvania established a state-funded program, independent of the
SRF, in March 1988 to help communities finance wastewater and other
projects.\11 In the early years of the SRF program, Pennsylvania
officials decided to finance about $248 million in wastewater
projects with these state funds rather than wait for SRF funding to
become available, according to state officials.  Also according to
these officials, the state decided to fund these projects as soon as
possible with state funds to reduce public health risks.  For
example, about $30 million was awarded to the City of Johnstown to
upgrade an existing treatment plant and thereby prevent raw sewage
overflows and inadequately treated wastewater from being discharged
into surface waters. 

According to a state official, Pennsylvania's percentage of funds
lent would have been higher if the state had chosen to fund these
$248 million in projects with SRF funds.  In that case, he said,
Pennsylvania's total amount of funds lent through the end of 1996
would have been $558 million, instead of $310 million, and the state
would have lent all available funds, instead of 60 percent of these
funds. 

Likewise, in Arizona, the state's decisions limited the amount of
funds lent.  According to a state official, efforts to inform local
government officials about the SRF program and interest them in
participating were not effective in the program's early years.  This
difficulty was compounded by restrictive provisions of state law that
further limited the amount of SRF funds lent.\12 The state official
said that the outreach effort was refocused in 1995.  He also noted
that the approval of changes in state laws in 1995 and 1996 helped
create a more positive atmosphere for outreach, even before the
changes took effect.  Arizona's percentage of funds lent was 55
percent at the end of 1995 and 81 percent at the end of 1996. 


--------------------
\11 Five of the other eight states--Illinois, Maryland, Missouri,
Oregon, and Texas--also had grant and/or loan programs.  These
programs ranged in size.  For example, in 1995 the funding available
through Maryland's program was approximately $1 million, while the
funding available through Illinois' program was about $185 million. 

\12 Several provisions of Arizona State laws restricted some
localities' ability to participate in the SRF by requiring that
voters approve loan agreements and other means.  According to a state
official, largely because of the marketing and legal factors, the
state did not make any loans during 1993 and 1994.  In July 1994, EPA
notified Arizona that it was not in compliance with the program's
regulations because it did not enter into binding commitments to fund
specific projects within a year of receiving its payments.  EPA
required Arizona to take corrective action or face the loss of these
grants.  In response, Arizona developed a corrective action plan,
which EPA approved.  Among other things, the plan recommended several
changes to the laws that limit local participation in the program. 
In 1995 and 1996, the Arizona State legislature approved many of the
recommended changes.  The state resumed making loans in August 1995
and, according to an EPA official, was in compliance with the
program's requirements in April 1996. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided copies of a draft of this report to EPA for its review
and comment.  On December 11, 1996, we met with EPA officials,
including the Chief of the State Revolving Fund Branch in the Office
of Wastewater Management, who noted that the report was generally
accurate and well researched.  In addition to suggesting
clarifications in certain places, which we have incorporated where
appropriate, EPA asked that we make it clear that the prevailing-wage
requirement expired at the end of September 1994 and that any
continued application would result from the states' decisions to
retain the requirement.  We have added language in the report to
clarify this point.  Subsequent to our meeting, EPA provided us with
written comments on this report, which are reproduced in appendix IV. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

We used a questionnaire and follow-up discussions to collect
information on SRF activities and finances from program officials
from the nine states.  We selected these states to provide diversity
in terms of SRF program size and complexity and other factors, such
as geography.  However, the conditions in these states are not
necessarily representative of the conditions in all 51 SRFs.  We also
interviewed EPA headquarters and regional officials who are
responsible for the SRF program.  We did not attempt to independently
verify the information collected from EPA or the states.  Appendix
III provides additional information on how we calculated the states'
percentages of funds lent. 

We conducted our review from March through December 1996 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

As arranged with your office, unless you publicly announce this
report's contents earlier, we plan no further distribution of the
report until 30 days after the date of this letter.  At that time, we
will send copies of the report to the appropriate congressional
committees and the Administrator of EPA.  We will also make copies
available to others upon request. 

Please call me at (202) 512-6111 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
V. 

Sincerely yours,

Stanley J.  Czerwinski
Associate Director
Environmental Protection Issues


SOURCES OF FUNDING FOR NINE
STATES' REVOLVING FUNDS
=========================================================== Appendix I

Under the Clean Water State Revolving Fund (SRF) Program, the states
use funds from six primary sources to make loans for wastewater
treatment and related projects.  These are

  -- federal grants,

  -- state matching funds,

  -- borrowed funds,

  -- unused funds from the Construction Grants Program,

  -- repayments of loans, and

  -- earnings on invested funds. 

All nine states received federal grants and provided state matching
funds.  These two sources generally accounted for most of the money
in the nine states' revolving funds.  Four of the nine states
borrowed money for their revolving funds.  Five states transferred
unused funds from the old Construction Grants Program.  All nine
states received some loan repayments.  Finally, eight states had
investment earnings on loan repayments. 

Table I.1 shows the amount and sources of funding for the nine states
we reviewed through each state's fiscal year 1996. 



                                        Table I.1
                         
                           Sources of Funding for Nine States,
                                       Through 1996

                                  (Dollars in thousands)

                                                   Transfer
                                                     s from
                                                   Construc
                          SRF                          tion      Loan  Investme
                       grants     State  Borrowed    Grants  repaymen        nt
State                 awarded     match     funds   Program        ts  earnings     Total
-------------------  --------  --------  --------  --------  --------  --------  --------
Arizona               $82,214   $12,559   $25,338        $0      $475      $444  $121,030
Florida               376,183   102,010         0    67,558    47,591    57,946  656,441\
                                                                                        a
Illinois              478,098    92,520         0    24,900    77,610    10,200   683,328
Louisiana             134,389    28,063         0         0     4,126         0   166,578
Maryland              239,892    49,566   143,046         0    12,717     9,052   454,273
Missouri              298,550    59,710   216,072       681    79,340    11,026   665,379
Oregon                124,033    20,399         0         0    16,400     2,600   163,432
Pennsylvania          390,178    83,276         0     1,255    43,866     2,514   521,088
Texas                 528,078   144,284   554,352   197,502    86,871    21,988  1,533,07
                                                                                        5
=========================================================================================
Total                $2,651,6  $592,387  $938,808  $291,896  $368,996  $115,770  $4,964,6
                           15                                                          24
-----------------------------------------------------------------------------------------
\a Total includes $5,153,000 in administrative funds that did not fit
in any of the categories. 


STATE LENDING, 1995 AND 1996
========================================================== Appendix II

The amount of funds lent increased overall in every state from 1995
to 1996, as shown in the table below.  In addition, the percentage of
funds lent generally stayed the same or increased during that period. 
(App.  III explains the basis for GAO's calculation of the percentage
of funds lent by state.)



                               Table II.1
                
                  Amount and Percentage of Funds Lent,
                        1995 and 1996, by State

                         Amount of funds lent    Percentage of funds
                        (thousands of dollars)           lent
                        ----------------------  ----------------------
State                         1995        1996        1995        1996
----------------------  ----------  ----------  ----------  ----------
Arizona                   $ 50,500    $ 98,555          55          81
Florida                    538,896     651,595          99          99
Illinois                   529,000     614,000          86          90
Louisiana                   91,173     131,983          62          79
Maryland                   268,889     318,889          61          70
Missouri                   461,973     531,368          82          80
Oregon                      82,900     122,900          57          75
Pennsylvania               266,575     310,787          53          60
Texas                    1,023,788   1,267,548          81          83
======================================================================
Total                   $3,313,694  $4,042,207        62\a        80\a
----------------------------------------------------------------------
\a The percentage shown is the median of the nine states' individual
percentages.  We believe this is a better way to measure the various
states' experience than to calculate the cumulative average for the
nine states, which would give greater weight to the states with large
programs. 

Source:  GAO's analysis of data provided by the states. 


METHODOLOGY FOR COMPUTING THE
PERCENTAGE OF FUNDS LENT
========================================================= Appendix III

To determine the percentage of funds lent by each state as of the end
of 1995 and 1996, we divided the total amount of funds lent by the
total funds available to lend, both as of the end of the year.  We
defined the total funds available as including the following six
components:  federal SRF grants, state matching funds, funds obtained
through leveraging, transfers of unused funds from the Construction
Grants Program, loan repayments, and investment earnings. 

We obtained information on loans made and funds available from each
state through a questionnaire and follow-up contacts.  In addition,
we compared the states' data on the amount of federal SRF grants with
the data we obtained from the Environmental Protection Agency (EPA). 
Our methodology was based on the approach used by the Ohio Water
Development Authority in conducting annual SRF surveys during 1992
through 1995.  In addition, we discussed our methodology with
officials from EPA, the Ohio authority, and the nine states, who
generally agreed with our approach. 

However, state officials raised two concerns about this methodology. 
First, a Missouri official suggested that loan repayments should not
be counted as part of available funds because they do not represent
"new" money; rather, repayments represent a recouping of funds
previously lent.  He said that including repayments would result in
double counting and thus overstate the amount of funds the states had
available.  We chose to include repayments because of the revolving
nature of the state funds.  Just as any loans made from repayments
would be included in the total of funds lent, any repayments need to
be included in funds available to provide a complete and consistent
accounting of the funds available.  If the repayments were excluded
from the total amounts of funds available to lend, Missouri's
percentage would be 91 percent; according to our methodology,
Missouri's percentage was 80 percent. 

Second, an Arizona official contended that we should not have counted
the state's full federal grants as being available to lend.  The
state did not accept its full federal grants for 2 years.  According
to his calculation, if the percentage of funds lent were based on the
amount that Arizona actually received (rather than the amount it
could have received), the state's percentage of funds lent would have
been 99 percent in 1995, rather than 55 percent.  In our
calculations, we used the full amount of federal grants that were
available to the state because the state's decisions resulted in
Arizona's not accepting its full federal grants. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE ENVIRONMENTAL
PROTECTION AGENCY
========================================================= Appendix III


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

David Marwick, Assistant Director
Lisa T.  Pittelkau, Evaluator-in-Charge
Bruce Skud, Senior Evaluator
Donald J.  Sangirardi, Evaluator
Kelly S.  Ervin, Social Science Analyst

OFFICE OF THE GENERAL COUNSEL

Richard P.  Johnson, Attorney-Adviser


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