Rural Water Projects: Federal Assistance Criteria Related to the Fort
Peck Reservation Rural Water Project (Testimony, 06/18/98,
GAO/T-RCED-98-230).

GAO discussed selected rural water projects, including the Fort Peck
Reservation Rural Water Project, focusing on: (1) the criteria for
participation in specified programs of the Department of Agriculture
(USDA), the Environmental Protection Agency (EPA), and the Bureau of
Reclamation (BOR) for funding rural water projects; (2) how the
characteristics of the individual projects align with the criteria of
the identified programs; and (3) the views of officials of the three
agencies as to the appropriateness of their being tasked with these
projects.

GAO noted that: (1) both USDA and EPA have programs under which rural
communities that meet specific criteria may receive grants or loans for
the construction of rural water projects, but BOR has no established
program for funding rural water projects and therefore has no
eligibility criteria; (2) instead, BOR has undertaken such projects when
tasked by Congress; (3) both USDA and EPA require, among other things,
that recipients demonstrate the ability to repay the loans provided to
them; (4) despite its lack of eligibility criteria, BOR, which has
concentrated its activities in 17 western states, does have a
long-standing policy on full reimbursement for its contributions to
local projects; (5) the characteristics of the Fort Peck project do not
meet some of the criteria for participation in either USDA's or EPA's
program, nor BOR's long-standing reimbursement policy; (6) specifically,
the project relies on grants rather than loans and thus does not meet
the criteria for economic feasibility and repayment; (7) officials of
the three agencies agreed that the project would meet real needs in the
communities; and (8) however, they expressed concerns about project
construction costs and noted that the project envisions the federal
government's funding a higher percentage of the project than is allowed
under agencies' policies.

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

 REPORTNUM:  T-RCED-98-230
     TITLE:  Rural Water Projects: Federal Assistance Criteria Related 
             to the Fort Peck Reservation Rural Water Project
      DATE:  06/18/98
   SUBJECT:  Water supply management
             Economically depressed areas
             Eligibility criteria
             Federal/state relations
             Rural economic development
             Regional development programs
             Water resources development
             Federal aid programs
             Loan repayments
IDENTIFIER:  Fort Peck Rural Water Project (MT)
             USDA Rural Utilities Service Program
             EPA Drinking Water State Revolving Fund
             Fort Peck Indian Reservation (MT)
             
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Cover
================================================================ COVER


Before the Subcommittee on Water and Power, Committee on Resources,
House of Representatives

For Release
on Delivery
Expected at
2 p.m.  EDT
Thursday
June 18, 1998

RURAL WATER PROJECTS - FEDERAL
ASSISTANCE CRITERIA RELATED TO THE
FORT PECK RESERVATION RURAL WATER
PROJECT

Statement of Susan D.  Kladiva, Associate Director,
Energy, Resources, and Science Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-230

GAO/RCED-98-230T


(141224)


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

  BOR -
  EPA -
  USDA -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to testify on legislation referred to your
Subcommittee that would authorize the Bureau of Reclamation (BOR) as
the designated source of funding for the Fort Peck Reservation Rural
Water Project.  In past years, legislation has tasked BOR with
specific rural water projects.  However, the Bureau's backlog of
authorized but unconstructed projects, the significant constraints on
the funding available, and concern that passage of such legislation
would further erode the basic responsibilities of the Bureau prompted
the House Subcommittee on Water and Power, Committee on Energy and
Natural Resources, to request our review of selected rural water
projects, including the Fort Peck Project.  Our report, issued to
that Subcommittee last month, provided information on the
characteristics of three proposed projects, and the criteria that
specified federal programs apply when considering applicants for
assistance.\1

Specifically, we (1) determined the criteria for participation in
specified programs of the U.S.  Department of Agriculture (USDA), the
Environmental Protection Agency (EPA), and BOR for funding rural
water projects; (2) determined how the characteristics of the
individual projects align with the criteria of the identified
programs; and (3) provided the views of officials of the three
agencies as to the appropriateness of their being tasked with these
projects.  We are here today to summarize the results of our work,
focusing on the Fort Peck Project. 

In summary, we reported that both USDA and EPA have programs under
which rural communities that meet specific criteria may receive
grants or loans for the construction of rural water projects, but BOR
has no established program for funding rural water projects and
therefore has no eligibility criteria.  Instead, BOR has undertaken
such projects when tasked by the Congress.  Both USDA and EPA
require, among other things, that recipients demonstrate the ability
to repay the loans provided to them.  Despite its lack of eligibility
criteria, BOR, which has concentrated its activities in 17 western
states, does have a long-standing policy on full reimbursement for
its contributions to local projects.  The characteristics of the Fort
Peck project do not meet some of the criteria for participation in
either USDA's or EPA's program, nor BOR's long-standing reimbursement
policy.  Specifically, the project relies on grants rather than loans
and thus does not meet the criteria for economic feasibility and
repayment.  Officials of the three agencies agreed that the project
would meet real needs in the communities.  However, they expressed
concerns about project construction costs and noted that the project
envisions the federal government's funding a higher percentage of the
project than is allowed under agencies' policies. 


--------------------
\1 Rural Water Projects:  Federal Assistance Criteria
(GAO/RCED-98-204R, May 29, 1998). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

BOR was created at the time of the Reclamation Act of 1902, which
provided for the construction of single-purpose irrigation projects
in the West.  Over the years, new projects have grown more ambitious,
and today they provide a host of benefits, including municipal and
industrial water supply, hydroelectric power, recreation, and flood
control.  Reclamation law determines how the costs of constructing
projects are allocated among the projects' beneficiaries, and last
year we testified on how that law has evolved.\2 BOR has no
established program for the construction of rural water projects, but
it has undertaken specific projects when tasked by the Congress to do
so.  BOR has a long-standing policy that projects' beneficiaries are
responsible for repaying their allocated share of the construction
costs plus interest. 

In 1995, we reported that eight federal agencies had 17 programs
designed specifically for rural areas to construct or improve water
and wastewater facilities.\3 Our focus today is on two of them: 
USDA's Rural Utilities Service and EPA's Drinking Water State
Revolving Fund.  USDA's program, which provides rural communities
with loans and grants, is funded at $577 million in fiscal year 1998. 
EPA's program, which provides states with capitalization grant funds
for loans, has been funded at $2 billion during fiscal years 1997 and
1998--its first 2 years. 

The legislation before you, H.R.  2306, would authorize the Fort Peck
Reservation Rural Water System.  If constructed, the system would
serve both the 13,700 residents of the Fort Peck Indian Reservation,
Montana, and the 10,700 residents of four surrounding counties in
northeastern Montana, at an estimated cost of $179 million.  The
current proposal by project proponents, which is not reflected in the
bill, would have the reservation portion constructed with 100-percent
federal funding and the off-reservation portion constructed with
85-percent federal funding and the communities are not required to
repay the federal share.  The proposed federal funding would total
$103 million for the reservation portion and $65 million for the
surrounding counties.  The tribes of the reservation would operate
the system through agreements with BOR, which would monitor the
system's operation.  The system is to be held in trust for the tribes
by the U.S.  government.  The Chairman of the Assiniboine and Sioux
Tribes, who reside on the reservation, in testimony before the
Congress, said that a new water district will be formed by the
off-reservation recipients in the four neighboring counties to
operate that portion of the system.  He explained that the project is
important because poverty levels are high on the reservation and the
lack of water for drinking, cooking, and sanitation is a source of
disease and poor health.  We did not evaluate the reasonableness or
costs and benefits of the project. 


--------------------
\2 Bureau of Reclamation:  Reclamation Law and the Allocation of
Construction Costs for Federal Water Projects (GAO/T-RCED-97-150, May
6, 1997). 

\3 Rural Development:  Patchwork of Federal Water and Sewer Programs
Is Difficult to Use (GAO/RCED-95-160BR, Apr.  13, 1995). 


   CRITERIA FOR PARTICIPATION IN
   SELECTED FEDERAL PROGRAMS
---------------------------------------------------------- Chapter 0:2

We identified a number of elements from the controlling laws,
regulations, and policies from USDA, EPA, and BOR that constitute the
criteria that proposed rural water projects must meet.  USDA's
program has direct criteria for participation.  EPA, which provides
grants to the states that must, in turn, develop their own plans and
policies for participation, established minimum requirements for
those plans, which constitute applicable criteria.  EPA also requires
that the states establish priorities for the projects and sets forth
criteria for doing so.  BOR, which has no formal program for rural
water projects, does have a long-standing policy on full
reimbursement for its contributions to the local projects it funds,
and it has concentrated its activities in the 17 western states that
constitute its service area.  These criteria and policy matters are
summarized in table 1. 



                                         Table 1
                         
                           USDA's and EPA's Criteria and BOR's
                             Policy for Rural Water Projects

USDA's Rural Utilities        EPA's Drinking Water State
Service                       Revolving Fund                 BOR
----------------------------  -----------------------------  ----------------------------
Population of a city or town  At least 15 percent of state
cannot exceed 10,000          fund must be used yearly for
                              projects serving no more than
                              10,000 users to the extent
                              projects are available

Projects may be for           Drinking water infrastructure
constructing, enlarging,      projects address compliance
extending, or improving       with the Safe Drinking Water
rural water supplies among a  Act and public health
variety of other uses         problems

Applicant must be a public    Applicant must be a community
entity, not-for-profit        water system publicly or
organization, or an Indian    privately owned or nonprofit
tribe                         noncommunity water system;
                              federally owned systems are
                              not eligible

Project must be economically  Applicant must be able to      100-percent repayment with
feasible with regard to       repay loan (with certain       interest
repayment                     exceptions when principal can
                              be forgiven)

Project's economic
feasibility should not be
threatened by a drop in
population

Applicant must be unable to
finance the project from own
resources or through
commercial credit and be
free of federal debt
judgment

Project should be designed    Project is not eligible if it
to meet the needs of present  is needed primarily for
or projected population       growth

Project must be necessary     Project may meet needs for
for orderly development and   reasonable growth over its
consistent with an approved   life
development plan

Facilities to be constructed
must be modest in size,
design, and cost

Applicant must have legal     Applicant must have
authority and responsibility  technical, managerial, and
to                            financial capacity to operate
--undertake the project,      the project
--operate and maintain the
proposed facility,
--meet the financial terms
of the project

                              EPA requires that states set
                              priorities on the basis of
                              --most serious health
                              threat,
                              --meeting Safe Drinking Water
                              Act standards,
                              --households most in need

                                                             Service area involves 17
                                                             western states
-----------------------------------------------------------------------------------------
From a project-specific perspective, a major distinction when
considering EPA's program is the requirement that each state set
priorities for the projects within its boundaries.  The relative
position of a project would depend on the characteristics of the
other projects competing with them for funding.  The states'
intended-use plans, including priorities among projects, must be
approved by EPA by September 1998.  Montana, the intended site of the
Fort Peck Project, has had its plan approved by EPA. 


   CHARACTERISTICS DO NOT MEET
   SOME PROGRAM CRITERIA
---------------------------------------------------------- Chapter 0:3

The characteristics of the Fort Peck Water Project under the current
proposal meet some but not all of the criteria of the three agencies. 
Table 2 shows the match-up of selected characteristics of the Fort
Peck Project with the criteria and policies of the agencies. 



                                Table 2
                
                 Comparison of Selected Agency Criteria
                   and Policy With Fort Peck Project
                            Characteristics

Project's characteristics     USDA          EPA           BOR
----------------------------  ------------  ------------  ------------
Envisions 85-percent federal  Project must  Applicant     100-percent
grant funding for off-        be            must be able  repayment
reservation portion           economically  to repay      with
                              feasible      loan (with    interest
                              with regard   certain       (for off-
                              to repayment  exceptions    reservation
                              (policy of    for           portion)
                              75-percent    forgiving
                              maximum       principal)
                              federal
                              share)

Would serve 13,700 residents                At least 15
on reservation and 10,700 in                percent of
surrounding area                            funding is
                                            to be used
                                            for water
                                            systems with
                                            10,000 or
                                            fewer users

Not assessed by state in                    States must
prioritization process                      prioritize
                                            projects on
                                            basis of
                                            health
                                            threats,
                                            standards,
                                            and needs
----------------------------------------------------------------------
The project does not meet all of the criteria of the USDA program. 
The criterion for economic feasibility is based on funding through
grants of 85 percent of the design and construction costs, as
recently proposed by Fort Peck officials.  This amount exceeds the
USDA program's maximum level of 75-percent funding for eligible
project costs. 

The project also does not meet all of the criteria of the EPA
program.  It does not meet the requirement for the loan program in
that its economic feasibility depends on grants.  In addition, the
project's service population is greater than the 10,000 allowed for
consideration as part of the set-aside for rural projects.  The
project has not been assessed by state officials in the
prioritization process, which would have considered health risks,
Safe Drinking Water Act standards, and household income. 

Similarly, the project's dependence on grants for the off-reservation
portion is inconsistent with BOR's long-standing policy of having
water users repay 100 percent of the costs of projects when the
federal government does not have a trust relationship with the
recipients, such as in the case of Indian tribes. 


   USDA'S, EPA'S, AND BOR'S VIEWS
   ABOUT FUNDING THE PROJECT
---------------------------------------------------------- Chapter 0:4

USDA, EPA, and BOR officials we contacted believe that the Fort Peck
Project is worthwhile and needed by the communities.  However, they
provided numerous reasons for the inappropriateness of their
agencies' being tasked with the project.  They said that their
existing federal assistance programs were not funded at levels to
accommodate large projects like Fort Peck.  Furthermore, the project
envisions federal authorizations at a higher percentage of the
project than is allowed under the agencies' policies. 


      USDA'S VIEWS
-------------------------------------------------------- Chapter 0:4.1

USDA's Rural Utilities Service's Director of Engineering and
Environment Staff said that it appears that all or part of the
project may be potentially eligible for financial assistance if the
appropriate project structure can be devised.  He said, however, that
the biggest drawback is cost, which is very large for the Fort Peck
project relative to the agency's available funding.  According to the
Assistant Administrator, Rural Utilities Service, the average loan
for rural water projects last year was $800,000, while the average
grant was $638,000.  The magnitude of the Fort Peck Project--at an
estimated $168 million federal share--is such that funding from other
sources will be critical to putting together a viable financing
proposal.  Finally, the Rural Utilities Service's Director of
Engineering and Environment Staff pointed out that the agency has
worked with officials of the project as well as other federal
agencies and would be willing to continue to do so in an effort to
explore possible solutions, such as developing the projects over
several years, if economically feasible solutions can be found. 


      EPA'S VIEWS
-------------------------------------------------------- Chapter 0:4.2

EPA officials said that the biggest limitation to federal assistance
for a large rural project such as Fort Peck is the limited amount of
funding in the program and the high cost of the project.  For
example, the proposed federal funding for the Fort Peck project is
estimated at $103 million for the reservation portion and $65 million
for the off-reservation portion.  However, EPA expects that Montana
will be eligible to apply for $7.1 million in federal funds for
projects in fiscal year 1998.  Furthermore, the state limits any
single loan to no more than $4 million.  In addition, the state did
not include the project on its priority list for funding. 


      BOR'S VIEWS
-------------------------------------------------------- Chapter 0:4.3

The Director of Operations for BOR expressed concerns about funding
for this project in light of the Bureau's budget constraints and
other demands for resources.  The proposed federal funding for the
project is $168 million, while BOR's annual budget targets for the
planning, design, and construction of water projects in the Great
Plains Region is $40 million to $50 million.  Furthermore, BOR's
long-standing position is that nonfederal interests should repay the
full costs of projects.  However, the current proposal for the
project would provide nonreimbursable funding for 85 percent of the
costs of the project (excluding the portion for the Fort Peck Indian
Reservation).  According to BOR area officials, the Bureau's role in
financing rural water projects has evolved partly because a federal
funding mechanism suitable for large regional projects does not now
exist.  The potential operation and maintenance costs to the federal
government on Indian projects, such as at Fort Peck, are another
important factor in light of budget constraints.  Nevertheless,
officials we spoke with maintained that the Bureau, which is within
the Department of the Interior, has a role to play when a project's
users are tribes for which the United States has a trust
relationship.  BOR officials said that their unique expertise in
designing large water projects is very useful to rural communities in
planning municipal water systems and that BOR has provided technical
assistance to the sponsors of the project. 


-------------------------------------------------------- Chapter 0:4.4

In conclusion, the Fort Peck Project has some characteristics that do
not match the criteria or policies of the agencies we reviewed. 
Thus, it would not likely be successful in making a routine
application to an agency for support.  The Congress has, in the past,
taken legislative action to authorize projects and assigned them to
specific agencies for execution.  Deciding which agency and under
what conditions is, of course, a policy question within the purview
of the Congress.  We hope that this information and analysis assists
you in assessing the relative merits of different policy choices. 
This concludes my statement, Mr.  Chairman.  I would be happy to
respond to any questions that you or other Members of the
Subcommittee may have. 


*** End of document. ***