Five ideas for State Revolving Fund programs to advance equity in 2023

Katy Hansen, Janet Meissner Pritchard, Stephanie Vo

States will allocate the $43 billion for water infrastructure in the Infrastructure Investment and Jobs Act (IIJA) through their State Revolving Fund (SRF) programs over the next five years. This blog outlines five clear policies and practices–many of which states already use–to improve drinking water and wastewater services in communities with the greatest needs:

• Identify disadvantaged communities on a sliding scale

• Reach out more proactively 

• Finance more project development and fund more technical assistance 

• Provide more grants to disadvantaged communities 

• Improve public participation and transparency 

Identify disadvantaged communities on a sliding scale

Achieving the goal of the Justice 40 Initiative–to ensure the 40 percent of the benefits of federal funds reach disadvantaged communities (DACs)—requires states to better identify which communities need help. Right now, many states use cut-offs that mark communities as disadvantaged on an in/out basis. For example, the Drinking Water SRF program in Illinois looks at four characteristics of the community: population size, median household income (MHI), unemployment rate, and service rates. Communities with a population below 25,000 and MHI below the statewide median qualify as disadvantaged; communities with over 25,000 people or higher incomes automatically do not.  

Among the communities that qualify as disadvantaged on an in/out basis, all have the same status. There is no ranking to indicate which communities are most in need. So a community with a household income far below the statewide median is eligible for the same level of help as one just below the cutoff. This method of identifying DACs is no doubt easier to administer, but much less fair or effective.

Instead, states should identify and provide additional help to disadvantaged communities based on a scale that shows the graduated level of need. Communities should receive points based on several indicators of need. Sliding scales help states to determine which communities are relatively more disadvantaged and provide more assistance to them. 

Encouragingly, some states have improved their policies to better identify disadvantaged communities. For example, Wisconsin recently implemented a scaled point system to determine which communities qualify as disadvantaged and how much additional support they will get.

Reach out more proactively

Many states rely on announcements and webinars–sometimes buried deep in websites–to spread the word about funding opportunities. The local decision makers that are not signed up for listservs and do not visit websites often do not know about SRFs. Research shows that utility managers and local elected officials in places with fewer than 10,000 people are less likely to know about SRFs. Community groups are typically even more in the dark about funding opportunities, application processes, and key deadlines. Ensuring that more disadvantaged communities benefit from federal funds for water infrastructure requires increasing awareness about SRF programs. 

Instead of expecting communities to find them, state SRF programs need to be proactive in their outreach. With IIJA resources, EPA will support states’ efforts to target outreach to local decision makers through presentations, workshops, webinars, and other marketing events. For example, one of the simplest approaches states should take is to make sure that every community water system in their state receives at least one outreach email.

Oklahoma has improved outreach to communities in the past few years. The state agency that administers the program developed and implemented a robust marketing plan by:

• conducting focus groups to understand the barriers to accessing the funds,

• developing an outreach plan to target communities and utilities to apply for SRFs, based on the Model Marketing Plan provided by the EPA,

• writing case studies to showcase the benefits and success of the SRF program, 

• spreading the word through newsletters, website highlights, press releases, and social media as well as hosting events  

In order to measure the effectiveness of outreach approaches, it would be helpful to track engagements with local decision makers. For example, states should provide anonymized data on the demographics and employers of attendees of webinars and other outreach efforts. 

Finance more project development and fund more technical assistance  

Communities with limited resources often need assistance to develop projects and applications for federal funds. Utility managers must assess needs, make plans, design solutions, conduct environmental reviews, and complete paperwork to develop projects and apply for SRFs. This is a technical, expensive, and time-intensive process. Communities with limited expertise, cash, or time often face too many barriers to move forward. 

However, states can–and some do–pay for project development and technical assistance (TA).  This reduces the burden that communities must shoulder.

For example, Ohio offers small 5-year, 0% interest loans to cover planning and design costs.  Colorado and Oregon offer up to $10,000 in planning grants and 100% forgivable loans to assist water systems serving disadvantaged communities, respectively. As a result, the amount of capital available for project development increased in Ohio from $10.9 million in FY2022 to $58.4 million in FY2023 for DWSRF projects.

States should also use SRF funds to provide more technical assistance. For example, the CFO to Go initiative in Texas provides free financial consultants to help utilities identify problems and develop plans. Iowa’s staff completed required environmental reviews rather than having the applicant do so. 

States can use a percentage of the funds they receive from annual appropriations and the IIJA to pay for technical assistance. On average, states have not fully utilized these set-asides. Maryland passed legislation last year that created a sub account to set aside funds for technical assistance and make it easier to track the use of funds for this purpose. More technical assistance should increase the number and quality of SRF applications.  

Provide more principal forgiveness to disadvantaged communities  

States mainly provide low-interest rate loans through their SRF programs. Water utilities have to repay loans with revenue from households and businesses that pay water bills. However, in many cases, communities just can’t afford the price tag of the water infrastructure that is needed to treat and distribute drinking water, wastewater, and stormwater. States can offer several types of additional subsidies to these communities. The most common additional subsidy is a loan with “principal forgiveness” that does not need to be repaid.  

Congress required states to issue 49% of most of IIJA funds for SRFs as principal forgiveness to disadvantaged communities. States should ensure these funds are distributed to the communities that need it most.

The IIJA funds and requirements should result in a dramatic increase in the amount of principal forgiveness that states award over the next five years. However, the policy is rooted in a short term federal law that could be gone in five years. States should provide more principal forgiveness to disadvantaged communities from funds other than the federal appropriation, such as the state match appropriation and loan repayment. Loan repayments made up over half of SRF resources before the IIJA passed will likely return to that level in five years. The requirement to provide 49% of awards as additional subsidy to disadvantaged communities currently does not apply to any of these billions in water funding. These funds could also be used to provide grants on terms determined by the state, without the need to conform to burdensome federal grant requirements. This would have significant advantages particularly for severely underserved communities with high existing debt burdens and poor credit ratings; such communities can have difficulty accessing principal forgiveness due to the loan structure of the award. Of course, allocating state appropriations to SRFs and loan repayment revenues for principal forgiveness or grants would reduce the amount of funds circulating back to the SRFs to support future projects, but this could be offset through strategic leveraging of SRFs to provide more loan funds.  

Improve public participation and transparency 

Public participation 

The public must be involved in a meaningful way in SRF policymaking. Specifically, states must publish “intended use plans” to explain the projects that will be financed with SRFs for public comment. States can improve public participation by making the intended use plans more accessible, holding public meetings and webinars at more convenient times, providing more information with clearer language and translation, compensating people for their time, and extending the time window to collect comments. The public was more actively engaged in commenting on intended use plans in several states last year. We hope this continues and that states respond to the feedback they receive. 

Transparency 

We need to understand who is benefitting from public investments, including the SRF programs. Analyzing who benefits requires combining SRF-financed project data with demographic data at the neighborhood, community, or watershed scale. There are several barriers to gathering and analyzing data on intended SRF-financed projects:

• The data are difficult to find on state websites. 

• The data must be converted to excel or csv files to be analyzed. Some project lists are not machine readable and must be manually transcribed before analysis. 

• Data are often incomplete or ambiguous, lacking vital information.

States need to provide better data on the projects they intend to finance and do so in a timely manner. Ideally, these data would include project descriptions, geocoded data on the location of projects, project type (such as lead pipes or emerging contaminants), priority score and rank, total funding amount, type and amount of additional subsidy, and whether the project serves a disadvantaged community according to the state definition.