As IIJA Funding Winds Down, States Should Better Target Principal Forgiveness
The Drinking Water State Revolving Fund (DWSRF) is approaching a significant transition. The additional supplemental funding provided to the program through the Infrastructure Investment and Jobs Act (IIJA), made available to states for their 2023-2027 state fiscal years, is coming to an end. This is happening while states continue to face enormous demand for drinking water infrastructure investment.
That makes every DWSRF dollar more important, and it makes decisions about limited principal forgiveness (PF) particularly consequential.
Principal forgiveness, the key affordability tool for SRF programs, allows states to reduce the amount of an SRF loan that a community ultimately has to repay. See our April 2025 brief on policies affecting the distribution of principal forgiveness. For communities that cannot afford to take on additional debt, principal forgiveness can make the difference between being able to move forward with a critical drinking water project and leaving that project unfunded.
But the amount of principal forgiveness available to states is limited. As IIJA supplemental appropriations end, states will need to make increasingly difficult decisions about which communities receive subsidies and how much they receive.
This makes one question increasingly important: How can states ensure that limited principal forgiveness reaches the communities that need it most?
EPIC’s recent public comments on Texas’ SFY27 Draft Intended Use Plan for General Activities shows how data can help answer that question.
Texas is increasing principal forgiveness—but its eligibility criteria could be better targeted
There is good news in Texas’ Draft State Fiscal Year 2027 DWSRF Intended Use Plan. Texas proposes to allocate the highest share of available funding to principal forgiveness for disadvantaged communities of any year in the past five years—an important step toward making DWSRF financing more affordable for communities with significant financial need.
Texas also reserves $6 million in additional subsidization specifically for Very Small Systems, defined by the state as systems serving 1,000 people or fewer. To qualify, a Very Small System must have an annual median household income (AMHI) no greater than 150% of the statewide AMHI.
In Texas, statewide AMHI is $78,476, meaning Very Small Systems with an AMHI as high as $117,714 can potentially qualify for this additional subsidy.
At first glance, that might sound like a reasonable way to recognize the challenges facing very small water systems. These systems have very few customers across whom they can spread the cost of infrastructure improvements, making even relatively modest projects difficult to finance.
But when subsidy dollars are limited, a broad eligibility threshold also raises an important question: Does this threshold meaningfully distinguish the systems experiencing the greatest need?
In Texas, our analysis suggests that the current threshold does not do much narrowing.
A 150% AMHI threshold excludes very few Very Small Systems
Using EPIC’s National Drinking Water Explorer Tool, we identified 2,790 Very Small Systems according to the state’s definition, in Texas. Applying Texas’ current 150% statewide AMHI threshold eliminates just 162 systems—or 5.8%—from eligibility among the 2,790 very small systems analyzed under this definition. AMHI data were unavailable for 579 systems, an important limitation to keep in mind.
In other words, the income threshold is broad enough that it does relatively little to differentiate among Very Small Systems.
That matters because our analysis also shows that Very Small Systems do not experience the same levels of socioeconomic and drinking water challenges.
When we divided systems into groups based on their AMHI relative to the statewide median, a much clearer pattern emerged. Among Very Small Systems at 0–75% of statewide AMHI, the average household poverty rate was 17.3%. It declined to 11.0% among systems at 76–100% of statewide AMHI and to just 6.5% among systems at 101–150%.
| Analysis Range | Threshold Range | Average estimated labor force unemployment (%) | Average estimated households below poverty rate (%) | Average paperwork violations (10yr) | Average health-based violations (10yr) | Average paperwork violations (5yr) | Average health-based violations (5yr) |
|---|---|---|---|---|---|---|---|
| 0-75% AMHI | $0 - $58,857 | 6.3 | 17.3 | 19.6 | 4.6 | 7.4 | 2.3 |
| 76-100% AMHI | $58,858 - $78,476 | 5 | 11 | 15.4 | 3.3 | 5.6 | 1.4 |
| 101-150% AMHI | $78,477 - $117,714 | 4.9 | 6.5 | 16.3 | 1.4 | 5.3 | 0.59 |
| >150% AMHI | > $117,714 | 4 | 4.7 | 13.3 | 1.07 | 4.8 | 0.67 |
Table 1: National Drinking Water Tool analysis on Very Small Systems
We see an even sharper difference in health-based drinking water violations. Systems at 76–100% of statewide AMHI averaged 3.3 health-based violations over ten years, compared with 1.4 among systems at 101–150%—a roughly 58% decline. The lowest-income systems experienced an even greater burden: systems below 75% of statewide AMHI averaged 4.6 health-based violations over ten years, more than three times the average among systems in the 101–150% group.
The relationship is not identical across every indicator. Paperwork violations, for example, do not decline consistently as AMHI increases. But taken together, the data show meaningful differences in need among the systems encompassed by Texas’ current eligibility threshold.
Data can help states take the guesswork out of subsidy thresholds
Based on these findings, EPIC recommended that Texas lower its Very Small System additional subsidization eligibility threshold from 150% to 100% of statewide AMHI.
That recommendation does not mean that Very Small Systems above the statewide median face no financing challenges. Small systems inherently face structural disadvantages because infrastructure costs must be spread across fewer ratepayers.
Instead, it recognizes that when principal forgiveness dollars are scarce, states need ways to identify where those structural challenges overlap with the greatest indicators of financial and drinking water need.
In Texas, systems at or below statewide AMHI experience substantially higher poverty and health-based violation burdens than systems between 101% and 150% of statewide AMHI. A 100% threshold would therefore better target a limited pool of additional subsidization toward communities experiencing multiple, overlapping challenges.
And principal forgiveness eligibility is only one piece of the puzzle.
Texas currently caps the additional principal forgiveness available to a Very Small System project at $500,000. Yet projects proposed by Very Small Systems in SFY27 have an average total project cost of approximately $5.2 million and a median cost of approximately $3.1 million. EPIC therefore also recommended that Texas consider increasing the amount of project costs eligible for principal forgiveness for the smaller subset of systems demonstrating the greatest need and/or establishing a percentage-based cap on the share of total project costs that principal forgiveness can cover.
Together, these approaches illustrate an important principle: to address the most severe affordability concerns, states can target eligibility more narrowly while providing deeper assistance to the communities that qualify.
The end of IIJA makes targeting increasingly important
This issue extends far beyond Texas.
IIJA provided a large infusion of federal dollars into the SRFs, including substantial additional subsidization. As those supplemental appropriations end, states will have fewer resources available even as communities continue to face significant infrastructure needs.
At the same time, congressional earmarks can reduce the amount of annual base DWSRF capitalization grants available for state programs, further increasing pressure on the resources states have available to provide as principal forgiveness.
In that environment, broad subsidy criteria may become increasingly difficult to sustain. States will need to think carefully about both sides of the equation: who qualifies for principal forgiveness and how much assistance qualifying communities receive.
The good news is that states do not have to make those decisions blindly. Tools like the National Drinking Water Explorer Tool and our Funding Tracker analyses can help states better understand the communities their programs serve and how thresholds and policy decisions impact communities. Used together, these tools allow states and advocates to test potential policy choices before adopting them.
Instead of asking whether 80%, 100%, 120%, or 150% of statewide AMHI sounds like the right eligibility threshold, states can examine what those thresholds actually mean for the water systems in their state.
As principal forgiveness becomes scarcer, the goal should not simply be to spread limited subsidy dollars as broadly as possible. Instead, states should target subsidies to where those dollars can make the greatest difference. And states should use the data available to understand which communities have the greatest need and design SRF policies accordingly.
