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Testimony of Cynthia C. Dougherty
July 29, 1999


July 29, 1999

Thank you, Mr. Chairman, for the opportunity to testify before you today on federal financing of rural drinking water projects. I am Cynthia Dougherty, Director of the Environmental Protection Agency's (EPA's) Office of Ground Water and Drinking Water, which oversees implementation of the Safe Drinking Water Act.

The Safe Drinking Water Act (SDWA) is the principal federal statute governing drinking water quality in the United States. Through the Act, the Environmental Protection Agency is charged with protecting the health of persons who drink water from public water supplies. EPA works with the States, drinking water suppliers, and the public to set health standards for drinking water, and to ensure that these standards are met by the public drinking water suppliers, so that the finished, treated water will be of high quality. Three years ago President Clinton signed into law amendments to the Safe Drinking Water Act, passed by Congress, that focus our efforts on the greatest risks to human health. Congress and the Administration agreed to make some significant changes in the Act to increase public health protection while controlling costs, and EPA and its partners in the drinking water community have spent the last three years making those changes a reality.

The drinking water universe is large -- 55,000 community water systems serve 250 million Americans -- and the vast majority of these systems serve fewer than 3,300 persons. These approximately 46,000 small community water systems provide water to 25 million persons in both rural and suburban America. Rural water systems face significant challenges as they work to provide safe drinking water, as low population densities increase the fixed costs of drinking water distribution while offering a limited consumer base to spread out costs.

EPA is committed to ensuring that all Americans served by regulated water systems, regardless of the size of their water system or their location, receive the public health protection benefits envisioned in the SDWA. The nation's public water systems must make significant infrastructure investments to continue to ensure the delivery of safe drinking water to their consumers. A 1997 EPA survey of drinking water needs identified that more than $138 billion will be needed over the next 20 years to fund necessary infrastructure improvements, including $37 billion for systems serving fewer than 3,300 persons. Historically, many water systems, particularly small systems, found it difficult to obtain affordable financing for those infrastructure improvements.

The Administration and Congress worked to address the needs of rural drinking water systems in the 1996 Amendments to the SDWA through technical assistance, flexibility in federal requirements, and funding. The SDWA Amendments provided a new source of financial assistance for public water systems to address public health protection needs. Between fiscal years 1997 and 1999, Congress appropriated nearly $2.8 billion through the Drinking Water State Revolving Fund (DWSRF) for States and Tribes to address their drinking water needs. States are required to provide a 20% match on DWSRF grants they receive. States use the funds received from EPA grants to capitalize their own drinking water revolving funds and finance other activities that support drinking water protection. States then use these revolving funds to provide financial assistance to systems to protect public health and ensure compliance with SDWA objectives. The State revolving funds provide low-cost loans to publicly and privately owned water systems, as well as nonprofit non-community ones, with repayment terms of up to 20 years. Interest rates on loans can be at, or below, market interest rates.

A recognition of the special needs facing small systems is the SDWA requirement that States target a minimum of 15% of the funds available to provide systems serving under 10,000 persons with financial assistance. Also, for many rural communities, even the low interest rate for loans available through the DWSRF may be too high to make loans affordable. To help address this challenge, a State has the option of providing additional subsidies, including forgiveness of principal, to systems that meet the State's definition of "disadvantaged." "Disadvantaged" systems can also receive extended loan repayment terms of up to 30 years.

EPA fully supports the financing of small drinking water projects to address public health concerns through the DWSRF, since many of the systems in greatest need are small water systems. States have made funding small water system projects a priority. As of the beginning of July 1999, States' revolving funds had made 637 loans totaling $1.3 billion dollars to eligible water systems for drinking water projects. More than three-quarters (497) of these loans went to small systems. While the SDWA requires that 15% of the funds be made available to small systems, States have provided almost 41% of the funds available to small systems. This is particularly notable because many States have found that these loans can take a significant amount of administrative assistance to finalize.

EPA has worked with other funding agencies, including the Rural Utilities Service (RUS) and the Department of Housing and Urban Development Community Development Block Grant (CDBG) Program, to coordinate activities and to address rural systems' needs. In 1997, EPA, RUS, and HUD issued a joint memorandum to foster cooperation between the agencies as they administer their grant and loan programs, and to encourage State administrators of our programs to do the same. This coordination is taking place. In Washington, nine projects from the first round of DWSRF applications were co-funded from various sources, including RUS, CDBG, and the State Public Works Trust Fund. In Maine, monthly meetings are held between the State staff administering DWSRF, CDBG and RUS funds to identify projects and optimize use of funds. Several States, including Oregon and Arizona, have developed one-stop meetings that bring funding agencies together in one place with potential applicants for funding. We will continue to work with rural funding organizations at the Federal and State level to provide coordinated assistance to rural water systems. The Department of Commerce advises us that, through its Economic Development Administration, it also provides financial assistance to rural communities to improve their water supply systems.

Examples of projects that have been funded include $36,000 to the city of Mitchell, Oregon to make improvements in its chlorination system in response to colifom bacteria contamination, and $1,030,000 to the City of South Bend to fund construction of a new membrane treatment facility. In addition, the Bangor [Maine] Water District used a $556,000 loan through a DWSRF set-aside to purchase 725 acres of land in the direct watershed of Floods Pond, the District's source of water, which will add protection from microbial contamination.

The DWSRF was created to address drinking water quality needs. States determine which projects are funded by using a system that ranks projects, giving priority to those projects that: address the most serious risk to human health, are necessary to ensure compliance with the requirements of the SDWA, and assist systems most in need on a per household basis. Eligible projects include expenditures to upgrade or replace drinking water infrastructure, treated water distribution or storage facilities, planning and design, and system consolidation. States are prohibited from providing loans to finance growth, economic development, dams, and most reservoirs and water rights.

States also have the option of setting aside funds from their DWSRF grants to support a number of SDWA priority initiatives including capacity development, operator certification, and source water protection. All of these activities can help water systems, including small rural systems, improve their ability to provide public health protection. One of the set-asides is specifically targeted to benefit small systems. This set-aside, which provides funding for technical assistance for small systems, has been popular among States, which reserved 1.6% (of a maximum 2%) of FY1997 grants or $20.2 million to conduct activities. States that have received FY1998 funds have reserved approximately the same percentage of their grants for this particular set-aside.

Some communities, small and large, have sought financial assistance for water projects as line items in EPA's budget. EPA is responsible for managing grants to these projects which are administered as direct grants with a 45% cost share by the grant recipient. EPA remains concerned that the funding of these projects undermines the authority of States -- as established by Congress in creating the DWSRF (and the Clean Water State Revolving Fund under the Clean Water Act) -- to decide which projects will provide the greatest public health and water quality benefits, and to fund those projects that the State determines to fund, in accordance with the applicable statutory criteria.

Loans given out through the DWSRF address the highest priority public health needs of water systems in each State, including those in rural areas. State priority lists are developed through a responsive public process which allows citizens within the State to participate in deciding on public health priorities. The Administration and Congress intended for the DWSRF to be the primary vehicle to fund drinking water treatment improvements, and EPA supports assistance to rural water systems under the DWSRF.

This concludes my prepared remarks. I would be happy to address your questions at this time.


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