[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)] [Notices] [Pages 1802-1804] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 99-665] ======================================================================= ----------------------------------------------------------------------- ENVIRONMENTAL PROTECTION AGENCY [FRL-6217-9] Drinking Water State Revolving Fund (DWSRF) Program Policy Announcement: Eligibility of Reimbursement of Incurred Costs for Approved Projects AGENCY: Environmental Protection Agency. ACTION: Notice. ----------------------------------------------------------------------- SUMMARY: The U.S. Environmental Protection Agency (EPA) is issuing a policy decision for the Drinking Water State Revolving Fund (DWSRF) program that will allow States to reimburse construction costs incurred by a public water system prior to execution of a loan agreement under specific conditions. The Agency published the proposed policy in the Federal Register on June 12, 1998 to seek public comment. Comments received during the comment period and in a stakeholder meeting held on July 13, 1998 were considered in developing the final policy. Background: The Safe Drinking Water Act (SDWA), as amended in 1996, established a DWSRF program to provide grants to States which, in turn, use the funds to provide loans to public water systems for infrastructure improvements. States are responsible for developing a priority system that identifies how projects will be ranked for funding and a comprehensive list of projects, in priority order, that are eligible for funding. States must also identify which projects on this comprehensive list will get funding within the current year, either by developing a separate fundable list or noting those projects on the comprehensive list. Both privately-owned and publicly-owned systems are eligible for funding. The Act also contains a provision which allows State DWSRF programs to provide loans to publicly-owned systems to refinance eligible projects. Specifically, section 1452(f)(2) allows States ``to buy or refinance the debt obligation of a municipality, intermunicipal or interstate agency within the State * * * in any case in which a debt obligation is incurred after July 1, 1993.'' The eligibility for refinancing does not extend to privately- owned systems. A number of States expressed concern that a strict interpretation of this refinance provision could delay construction of projects associated with privately-owned systems that are on the priority list for funding and are needed to solve public health problems. In some States, particularly those that leverage capitalization grants to generate more funds for projects, loan agreements with applicants are finalized at specific time periods during the year to coincide with financing. These States often make ``bridge'' loans to fund activities prior to execution of the formal loan agreement which occurs after the State has completed financing. Other States face challenges related to the seasonal nature of construction schedules. States wanted to have the flexibility to notify eligible privately and publicly-owned systems that they will receive funding from the State and then reimburse the systems for costs incurred in the time period between the notification and execution of the loan agreement. This flexibility would encourage systems to move ahead with construction in order to, for example, take advantage of seasonal construction cycles. EPA does not believe that the intention of section 1452(f)(2) was to preclude funding of eligible costs in these situations. Projects which have been identified for funding on the priority list and that receive notification from the State should be able to move [[Page 1803]] ahead with construction and have these short-term construction costs included in the DWSRF loan under certain conditions. In its June 12, 1998 Federal Register document, the EPA proposed that any project that has been given approval, authorization to proceed, or any similar action by the State prior to the actual project construction could be eligible for reimbursement of construction expenses incurred after such State action, provided that the project met all of the requirements of the DWSRF program. Such a project would have to be on the State's fundable list, developed using a priority system approved by EPA. A project on the comprehensive list which could be funded when a project on the fundable list was bypassed using the State's bypass procedures could also be eligible for reimbursement of costs incurred after the system had been informed that it would receive funding. These requirements would apply regardless of whether the system financed costs using a short-term debt instrument or internal capital. The proposal further noted that projects receiving reimbursement of incurred costs would be subject to all other Federal requirements required of a recipient of Federal funds, including an environmental review which must consider the impacts of the project based on the pre- construction site conditions. A failure to comply with the State's environmental review process could not be justified on the grounds that costs had already been incurred, environmental impacts had already been caused, or contractual obligations had been made prior to the binding commitment. Finally, the proposal solicited comment on whether a privately- owned system that had been constructed without meeting the above listed criteria could get refinanced from the DWSRF if it used internal capital instead of a debt obligation. The proposal suggested that internal capital be treated the same as a debt obligation in these situations. Comments Comments were received from 20 parties, all but one of whom supported the policy of reimbursing systems that initiate construction after being notified of the State's intent to fund the project. Most of the concern about the policy was directed at two aspects of the proposal. The first concerned viewing internal capital used by a system to complete construction, without having first met the criteria for reimbursement, as equivalent to a debt obligation. Seven commentors indicated that internal capital should not be viewed as equivalent to debt--that if a system uses its own funds, it should be allowed to apply for a loan to cover those costs. The second was whether to allow reimbursement of planning and design costs that occurred prior to the system's receiving notification to proceed. Eleven commentors indicated that planning and design should be treated in the same manner as it is for other loans. They noted that if EPA were to determine that planning and design costs were only eligible after a system had received notification from the State that it would receive funds, it would make it more difficult for privately-owned systems to get on the priority list in States which require planning and design to be completed before the project can even be placed on the fundable list. This would also be inconsistent with the Clean Water SRF policy that includes costs incurred for planning and design in the project loan, regardless of when planning and design occurred. The commentors recommended that reimbursement include construction costs and prebuilding costs, which include planning and design. A few commentors recommended that EPA extend the time frame over which costs could be reimbursed to include the time period during which the SDWA Amendments were in development, to July 1, 1993 (target date for refinancing publicly-owned systems), or to the date that a State passed legislation authorizing its program. A few State representatives asked for flexibility in defining what constitutes authorization to proceed and noted that in some States, the requirement that a project be on a fundable list before costs can be reimbursed would be too late in that State's process. Response to Comments EPA recognizes that excluding eligibility of planning and design costs could be problematic for systems and for States. Disallowing these costs for reimbursed projects would imply that prebuilding costs incurred by privately-owned systems when preparing to apply for a loan could not be recouped. Additionally, it is more consistent with the Clean Water SRF and the DWSRF for publicly-owned systems to consider these costs eligible. Concerning the issue of whether internal capital should be viewed the same as a debt obligation, EPA believes that there is no substantive difference between internal capital and a debt obligation when a system requests a DWSRF loan to fund a project that it has completed. EPA further believes that congressional intent and the statute restricts the use of DWSRF funds for refinancing to projects that were completed by publicly-owned systems and that the only exception to this is the short-term reimbursement of costs to allow systems that are in line to receive funds to begin construction as soon as possible. EPA, therefore, does not support extending the time frame from which privately-owned systems could be eligible for reimbursement. In developing the proposal, the Agency recognized that States differ somewhat in their procedures for notifying applicants that they will receive a loan and has proposed language that allows considerable flexibility. Final Policy The refinancing of project costs associated with a privately-owned system is an ineligible activity under the DWSRF program, regardless of the source of financing used to complete a project. A project (for a privately-or publicly-owned system) that has been given approval, authorization to proceed, or any similar action by the State prior to initiation of construction will be eligible for reimbursement for construction costs incurred after such State action, provided that the project meets all of the requirements of the DWSRF program and the following criteria. Such a project must be on the State's fundable list, developed using a priority system approved by EPA. A project on the comprehensive list which is funded when a project on the fundable list is bypassed using the State's bypass procedures may also be eligible for reimbursement of costs incurred after the system has been informed that it will receive funding. Prebuilding costs, such as planning and design, are also eligible when a system receives a loan for construction. Systems may receive reimbursement regardless of the method used to finance the short-term construction costs. Internal capital and debt obligations will be viewed as equivalent for the purposes of this policy. Projects receiving reimbursement of incurred costs are subject to all other Federal requirements required of a recipient of Federal funds, including an environmental review which must consider the impacts of the project based on the pre-construction site conditions. Failure to comply with the State's environmental review process cannot be justified on the grounds that costs have already been incurred, environmental impacts have already been caused, or contractual obligations [[Page 1804]] have been made prior to the binding commitment. FOR FURTHER INFORMATION CONTACT: The Safe Drinking Water Act Hotline, telephone (800) 426-4791. Information about the DWSRF program, including program guidelines and State contact information, is available from the EPA Office of Ground Water and Drinking Water Web Site at the URL address ``http://www.epa.gov/safewater.'' Dated: December 28, 1998. Cynthia C. Dougherty, Director, Office of Ground Water and Drinking Water. [FR Doc. 99-665 Filed 1-11-99; 8:45 am] BILLING CODE 6560-50-U