ENVIRONMENTAL PROTECTION AGENCY
CFDA 66.458 CAPITALIZATION GRANTS FOR STATE REVOLVING FUNDS
I. PROGRAM OBJECTIVES
Capitalization grants are awarded to States to create and maintain State Revolving Funds (SRFs)
to: (1) enable States to encourage construction of wastewater treatment facilities to meet the
enforceable requirements of the Clean Water Act (Act), (2) increase the emphasis on nonpoint
source pollution control and protection of estuaries, and (3) establish permanent financing
institutions in each State to provide continuing sources of financing to maintain water quality.
The SRF provides loans and other types of financial assistance (but not grants) to qualified
communities and local agencies. The SRF is a permanent revolving fund to provide loans and
other assistance (40 CFR section 35.3115).
II. PROGRAM PROCEDURES
The SRF program is established in each State by capitalization grants from the Environmental
Protection Agency (EPA). Since the enabling legislation was enacted in 1987, capitalization
grants have been available to States in most years. EPA implements the SRF in a manner that
preserves a high degree of flexibility for States in operating their revolving funds in accordance
with each State's unique needs and circumstances.
States are required to provide an amount equal to 20 percent of the capitalization grant as State
matching funds in order to receive a grant. Capitalization grant applications shall include: (1) an
Intended Use Plan (IUP), which lists proposed projects eligible for financing from SRF loans; (2)
an identification of the source of the matching amount; (3) a proposed payment schedule; and,
(4) certain certifications and demonstrations.
The State shall provide an Annual Report to the EPA on its SRF program.
Legislation relating to the SRF program is in Title VI of the Act, and the regulations are in 40
CFR part 35, Subpart K.
III. COMPLIANCE REQUIREMENTS AND SUGGESTED AUDIT PROCEDURES
In developing the audit procedures to test compliance with the requirements for a Federal
program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to
identify which of the 14 types of compliance requirements described in Part 3 are
applicable and then look to Parts 3 and 4 four the details of the requirements.
The audit focus is on a State's SRF program, rather than individual capitalization grants awarded
to States by EPA.
A. Activities Allowed or Unallowed
1. The SRF may provide financial assistance: (1) to municipalities, inter-municipal, interstate, or
State agencies for the construction of publicly owned treatment works, as defined in section 212
of the Act that are on the State's project priority list; (2) for implementing nonpoint source
management programs under section 319 of the Act; and (3) for developing and implementing
estuary management plans under section 320 of the Act.
The six allowable types of financial assistance are:
a. Loans (not grants) and other authorized forms of financial assistance for qualified projects;
b. Refinancing of existing debt obligations;
c. Guaranteeing or purchasing of insurance for local debt obligations;
d. Guaranteeing of or using as a source of repayment for SRF debt obligations (providing that the
net proceeds of the sale of such bonds are deposited in the SRF);
e. Loan guarantees for similar revolving funds established by municipalities or intermunicipal
f. Paying SRF administrative expenses.
2. SRF funds may be used for the reasonable costs of administering and managing the SRF.
C. Cash Management
The State may draw cash from the Letter-of-Credit (LOC) for :
1. Loans - when the SRF receives a request from a loan recipient, based on incurred costs,
including pre-building and building costs.
2. Refinance or purchase of municipal debt - generally, when at a rate no greater than equal
amounts over the maximum number of quarters that payments can be made, and up to the portion
of the LOC committed to the refinancing or purchase of the local debt.
3. Purchase of insurance - when insurance premiums are due.
4. Guarantees and security for bonds - immediately, in the event of imminent default in debt
service payments on the guaranteed/secured debt.
5. Administrative expenses - cash can be drawn based on a schedule that coincides with the rate at
which administrative expenses will be incurred (40 CFR section 35.3160).
G. Matching, Level of Effort, Earmarking
1. Matching Requirement
States are required to deposit into the SRF from State monies, an amount equal to 20 percent of each grant payment. If the State provides a match in excess of the required amount, the excess balance may be banked toward subsequent match requirements. States generally report the total amount of their matching for a capitalization grant in an annual SRF report to EPA. The match is required to be made on or before the time that EPA funds are drawn (40 CFR section 35.3135(b)).
2. Level of Effort - Not Applicable
The maximum amount allowable for administering and managing the SRF is 4 percent of the
cumulative amount of capitalization grant awards received. When the administrative expense of
the SRF exceeds 4 percent, the excess must be paid from sources outside the SRF (40 CFR
H. Period of Availability of Funds
"Grant Payments" from a capitalization grant shall begin in the quarter in which the grant is
awarded, and generally end no later than 8 quarters after the grant is awarded (40 CFR section
1. Financial Reporting
a. SF-269, Financial Status Report - Applicable
b. SF-270, Request for Advance or Reimbursement - Not Applicable
c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not
d. SF-272, Federal Cash Transactions Report - Applicable
2. Performance Reporting - Not Applicable
3. Special Reporting
The State must provide an Annual Report to EPA according to the schedule in the grant
agreement (OMB No. 2040-0118). The report shall address how the State:
a. Conducted environmental reviews for Section 212 projects funded by the SRF;
b. Deposited the required matching funds;
c. Made required binding commitments.
N. Special Tests and Provisions
1. Environmental Review requirements
Compliance Requirement - The State must conduct reviews of the potential environmental
impacts of all Section 212 construction projects receiving assistance from the SRF, including
nonpoint source pollution control and estuary protection projects that are also Section 212
projects (40 CFR section 35.3140).
Audit Objective - Determine whether the State is performing environmental reviews before
Suggested Audit Procedures
a. Inquire of SRF management about the environmental review procedures in place.
b. Select a sample of projects that began during the year to ascertain that the decisions were
rendered prior to the project proceeding and were approved in the State environmental review
2. Binding Commitments
Compliance Requirement - A "binding commitment" is a legal obligation by a State to a local
recipient that defines the terms for assistance under the SRF. Cumulative binding commitments
must equal at least 120 percent of cumulative capitalization grant payments received one year
earlier. Binding commitments requirements are intended to help assure that the State utilizes
grant funds in a timely manner. EPA may withhold future payments and require adjustments to
the payment schedules before releasing further payments if the State does not meet the binding
commitment requirement. States generally report the total amount of their binding commitments
in an annual SRF report to EPA (40 CFR sections 35.3135(c) and 35.3165(a)).
Audit Objective - Determine whether States have complied with the requirement to make
binding commitments equal to or greater than 120 percent of the amount of the capitalization
Suggested Audit Procedure
Review binding commitments in conjunction with the EPA payment schedules to ascertain if the
State entered into cumulative binding commitments in an amount at least equal to 120 percent of
the cumulative grant payments received 1 year earlier (i.e., cumulative binding commitments in the
current year should be equal to or greater than 120 percent of cumulative grant payments made
through the previous year).
3. Fund Establishment, Loan Repayments, and Fund Earnings
Compliance Requirements - The State shall establish a separate account or series of accounts
that is dedicated solely to providing loans and other forms of financial assistance. All loan
repayments, including principal and interest, and interest earnings on investments, must be
credited directly to the SRF. Repayment of loans shall begin within one year after project
completion, and loans shall be fully amortized over not more than 20 years after project
completion (40 CFR sections 35.3110(b) and 35.3120(a)).
Audit Objectives - Determine whether the State has a separate account or series of accounts for
the SRF. Determine whether principal and interest payments, and interest earnings on
investments, were properly credited to the SRF.
Suggested Audit Procedures
a. Ascertain if the SRF is a separate account, or series of accounts, dedicated solely to purposes
of the program.
b. Test a sample of projects funded by the SRF and for which repayments were due during the
year to determine that principal and interest payments were properly credited to the SRF
c. Test a sample of loan agreements and other project records to ascertain if the repayments
began within one year of project completion and the loans are scheduled for full amortization
within 20 years.
d. Obtain a list of investments made during the year and ascertain if earnings on investments were
properly recorded in the SRF.
4. SRF as Security for Bonds
Compliance Requirement - To use the SRF as security or a source of revenue for the payment
of principal and interest on revenue or general obligation bonds issued by the State, the net
proceeds (i.e., funds raised from the sale of bonds minus insurance costs) of the sale of such
bonds must be deposited in the SRF (40 CFR section 35.3120(d)).
Audit Objective - Determine whether the State placed the net proceeds from the sale of bonds
guaranteed by the SRF into the SRF.
Suggested Audit Procedures
Review bond documentation and trace amounts qualifying as net proceeds to accounts in the
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