Rural Water Projects: Federal Assistance Criteria Related to the Lewis
and Clark Rural Water Project (Testimony, 06/18/98, GAO/T-RCED-98-231).

GAO discussed selected rural water projects, including the Lewis and
Clark 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 Lewis and CLark 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-98-231
     TITLE:  Rural Water Projects: Federal Assistance Criteria Related 
             to the Lewis and Clark Rural Water Project
      DATE:  06/18/98
   SUBJECT:  Water supply management
             Economically depressed areas
             Eligibility criteria
             Federal/state relations
             Regional development programs
             Rural economic development
             Water resources development
             Loan repayments
IDENTIFIER:  Lewis and Clark Rural Water Project (IA/MN/SD)
             EPA Drinking Water State Revolving Fund
             
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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
LEWIS AND CLARK RURAL WATER
PROJECT

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

GAO/T-RCED-98-231

GAO/RCED-98-231T


(141223)


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 Lewis and Clark 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 Lewis and Clark Project.  Our report, issued
to that Subcommittee last month, provided information on the
characteristics of the projects and the criteria that selected
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 Lewis and Clark 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
Lewis and Clark 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 these: 
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.  1688, would authorize the Lewis and
Clark Rural Water System.  If constructed, the system would provide a
supplemental supply of drinking water to 22 communities in South
Dakota, Minnesota, and Iowa.  It would serve a population of over
180,000, including the city of Sioux Falls, South Dakota, with its
population of approximately 120,000.  The total cost is estimated at
about $283 million.  The proposed federal share is 50 percent for the
Sioux Falls component and 80 percent for the remaining area, for a
total of about $226 million and does not require the communities to
repay the federal share.  The project is intended to solve water
supply problems that none of the member communities could afford to
solve on their own.  The environmental report on the project says
that "the project would provide adequate supplies of good quality
drinking water to areas where current water supplies are
insufficient, are at risk of contamination or are of inferior
quality." 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.  Two of the states (South Dakota
and Minnesota) have had their plans approved by EPA; the other state
(Iowa) had not yet had its plan approved as of the completion of our
review. 


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

The characteristics of the Lewis and Clark Rural Water Project that
would be authorized by H.R.  1688 meet some but not all of the
criteria of the three agencies.  Table 2 shows the match-up of
selected characteristics of the Lewis and Clark Project with the
criteria and policies of the agencies. 



                                Table 2
                
                 Comparison of Selected Agency Criteria
                and Policy With Lewis and Clark Project
                            Characteristics

Project's characteristics     USDA          EPA           BOR
----------------------------  ------------  ------------  ------------
Envisions 80-percent federal  Project must  Applicant     100-percent
grant funding (50 percent     be            must be able  repayment
for Sioux Falls component)    economically  to repay      with
                              feasible      loan (with    interest
                              with regard   certain
                              to repayment  exceptions
                              (policy of    for
                              75-percent    forgiving
                              maximum       principal)
                              federal
                              share)

Includes Sioux Falls, with a  Population    At least 15
population of 120,000         of a city or  percent of
                              town cannot   funding is
                              exceed        to be used
                              10,000        for water
                                            systems with
                                            10,000 or
                                            fewer users

Not assessed by states in                   States must
prioritization process                      prioritize
                                            projects on
                                            basis of
                                            health
                                            threats,
                                            standards,
                                            and needs

Located in South Dakota,                                  Service area
Iowa, and Minnesota                                       of 17
                                                          western
                                                          states
                                                          (excludes
                                                          Iowa and
                                                          Minnesota)
----------------------------------------------------------------------
The project does not meet some of the criteria of the USDA program. 
Namely, it includes a city (Sioux Falls) with a population exceeding
the definition of a rural area as a location with fewer than 10,000
people.  Thus, only the rural component would meet the criterion. 
The project also does not meet the criterion for economic feasibility
for repayment in that the legislation envisions federal funding
through grants of 80 percent of the design and construction costs (50
percent for the Sioux Falls component).  This amount exceeds the USDA
program's policy to fund a maximum of 75 percent of eligible project
costs. 

The project also does not meet some of the criteria of the EPA
program.  For example, it does not meet the economic feasibility
requirement for the state loan program in that it depends on grants
to cover 80 percent rather than a loan (50 percent for the Sioux
Falls component).  In addition, the inclusion of an entity with more
than 10,000 people would call into question the project's
applicability for the portion of EPA's state grant moneys that states
are to use for projects with populations under 10,000.  Furthermore,
the project has not been assessed by state officials in the
prioritization process for funding, which would have considered
health risks, Safe Drinking Water Act standards, and household
income. 

Similarly, the project's dependence on grants is inconsistent with
BOR's long-standing policy of having water users repay 100 percent of
the costs of projects.  In addition, 2 of the 3 states involved in
the project--Iowa and Minnesota--are not among the 17 western states
that constitute BOR's service area. 


   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 Lewis and
Clark 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 Lewis and Clark.  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 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 Lewis and Clark project
relative to the agency's available funding.  USDA annually allocates
rural water project funding to the states.  The allocations in all
three states involved would not fund the project.  The proposed
federal funding of the Lewis and Clark project totals about $226
million, while the total fiscal year 1998 allocation to all three
states that the project would serve is $46 million.  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 Lewis and Clark 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 project
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 Lewis and Clark is the limited
amount of funding in the program and the high cost of the project. 
With its estimated federal funding of $226 million, the project is
too costly to be accommodated by available grants to the states.  For
example, the fiscal year 1997 grant for one of the states--South
Dakota--was $9.5 million, and the state has commitments for funding
six projects with the grant.  The state has applied for its $7.1
million share of available fiscal year 1998 funds.  Officials said
that the only way they could envision involvement of Lewis and Clark
in their program would be the use of a loan to provide a state match
of federal funds if a match were required.  Furthermore, when a
system is located in more than one state, as with Lewis and Clark,
the states could decide which state would provide a loan, but funding
such a system jointly could be complicated by the different ranking
criteria and requirements among the states.  In any event, only a
small portion of funding could come from the fund, compared with the
size and cost of the large regionalized system of Lewis and Clark. 


      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 about $226 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, pending authorization for the
project would provide nonreimbursable grant funding for 80 percent of
the costs of the project (50 percent for Sioux Falls).  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.  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 guidance, oversight, and
technical assistance in the planning process for the Lewis and Clark
project. 


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

In conclusion, the Lewis and Clark 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. ***