Coordinating Environmental Nonprofit work on Disadvantaged Community and Affordability Criteria Definitions
After the announcement of the Justice40 initiative and the passage of the Infrastructure Investment and Jobs Act (IIJA), the EPA, State Revolving Fund (SRF) administrators, and community advocates started focusing on how to ensure the nearly $44 billion of federal assistance, allocated through the State Revolving Fund (SRF) programs, reach communities most in need. An important component of this effort is how these communities–referred to as disadvantaged communities (DACs)–are defined and prioritized to receive assistance, especially principal forgiveness.
The EPA guidance on IIJA funding in March 2022 and report in June highlight that increasing investment in DACs is a key priority. State administrators have taken up the mantle by reviewing their individual definitions of DACs for the Drinking Water SRF (DWSRF), affordability criteria for the Clean Water SRF (CWSRF), and the rules dictating how principal forgiveness will be distributed to eligible communities. Advocates are actively engaged in state policy reform through the submission of comments on state Intended Use Plans (IUPs) and work with state administrators to further equity in state policies. Identifying and aligning advocates’ specific policy asks can strengthen efforts to ensure the equitable distribution of federal assistance.
In summer 2022, a group of environmental nonprofits gathered to share thoughts on state policies that dictate how SRF assistance is allocated and ways to increase equity in the process. The discussion summarized in this blog focused on three areas:
Where are DAC definitions outlined and who has discretion to define DACs for the purpose of allocating principal forgiveness?
What is in/out versus sliding scale definitions to determine DAC eligibility?
What is the impact of caps on principal forgiveness for DACs?
1. Where are DAC definitions outlined and who has discretion to define DACs for the purpose of allocating principal forgiveness?
In many cases, a state defines DAC criteria in a statute or administrative rule for the purpose of Priority Project List (PPL) ranking or for interest rates. This does not mean that the same DAC criteria outlined for the state must be adopted in the IUP to allocate principal forgiveness, unless state law specifically requires certain DAC criteria be used for principal forgiveness allocation.
Most states expressly grant discretion to the state SRF agency to define how SRF assistance, including principal forgiveness, will be allocated to communities across the state, meaning the SRF agency has the ability to define DACs. References to “where the DAC definition is lodged” can be misleading, and carry assumptions (often without legal grounds) that a DAC definition from a different context controls principal forgiveness allocation.
The issue of concern then becomes whether state SRF administrators recognize and utilize the discretion they have to define DACs and distribute principal forgiveness in the IUP. Some state administrators argue that to revise the DAC definition, the definition must undergo a legislative process or rulemaking process. In many cases, this is not true. Policymakers could assert that they have more limited opportunities to reform SRF policies than may actually be the case because state DAC criteria established for another purpose is conflated with DAC criteria to define eligibility for the principal forgiveness.
Illinois’ adoption of an administrative rule for the purpose of allocating principal forgiveness
The state of Illinois has adopted an administrative rule which outlines affordability criteria for principal forgiveness eligibility for Illinois' CWSRF (35 Ill. Admin Code 365.250). No such rule has been adopted to define principal forgiveness eligibility for the state's DWSRF, however. The Illinois Environmental Protection Agency, which administers the DWSRF in Illinois, has adopted criteria defined in an Illinois administrative rule about eligibility for discounted interest rates on DWSRF loans to determine eligibility for principal forgiveness from the DWSRF (Ill. Admin. Code 35, § 662.210). As argued in EPIC's comments on the Draft IUP for Illinois' DWSRF, nothing in Illinois law requires the agency to do so, however.
In fact, the Illinois Administrative Code expressly clarifies that the Agency has discretion to determine the availability, amounts, limitations, and method of distribution for any principal forgiveness from Illinois' DWSRF (35 Ill. Admin Code 365.250).
2. What is in/out versus sliding scale definitions to determine DAC eligibility?
Most states use an “in/out definition” to define DACs. If a community meets the specified set of criteria, they qualify as a DAC. There is a strict cut-off threshold between communities that qualify as DACs, and those that do not. Moreover, all communities that qualify as DACs have the same status–there is no ranking of DACs to identify the most disadvantaged communities compared to those that are relatively less disadvantaged. Awarding the same subsidies to relatively less disadvantaged communities may mean that the most disadvantaged communities may not receive subsidies at the level needed to meet their more severe needs.
Ohio’s in/out DAC definition
Ohio EPA defines DACs for the DWSRF program using the criteria adopted from Ohio Administrative code below:
Applicants for general drinking water funds must meet the community size criteria (service area population) as well as at least 3 of the 4 socio-economic criteria.
** The Draft IUP clarifies that the population size criterion will be waived for projects seeking assistance from the new LSLR and emerging contaminants (EC) programs, but LSLR and EC projects must still meet 3 of the 4 socio-economic criteria to be eligible for DAC principal forgiveness from the LSLR and EC funding. See EPIC’s comments to Ohio EPA.
An alternative methodology to define DACs is a sliding scale set of criteria for awarding DAC points. Communities receive points for several DAC criteria and the communities with a cumulative score above the cut-off threshold qualify as DACs. This DAC score enables DACs to be ranked in accordance with their level of disadvantage.
Wisconsin’s scaled DAC definition
Wisconsin’s FY2023 DWSRF IUP uses scaled indices to award points for multiple relevant factors to define DACs. The scaled indices award more principal forgiveness points to communities assessed to be relatively more disadvantaged in relation to each factor to arrive at a scaled DAC score (also referred to as a principal forgiveness score) for each DWSRF project. The percentage of principal forgiveness that each community could receive based on their relative principal forgiveness score is presented in Table 7 of the FY2023 IUP.
Image: Table 7 of Wisconsin’s Safe Drinking Water Loan Program Intended Use Plan, page 14
This approach also avoids sharp cut-off lines between communities deemed eligible for principal forgiveness versus those deemed ineligible.
3. What is the impact of caps on principal forgiveness for DACs?
Several state IUPs include policies that impose flat caps on the amount of principal forgiveness each applicant can receive per year, in an effort to distribute the limited amount of principal forgiveness across as many communities in the state as possible. Although it is necessary, given the limited amount of principal forgiveness available, flat caps discriminate against larger communities with more expensive water infrastructure needs. Larger communities subject to a flat cap are likely to receive a much smaller portion of their project costs as principal forgiveness, compared to smaller communities with smaller and less expensive projects, regardless of which community is more disadvantaged.
Wisconsin’s flat cap on principal forgiveness undermines its DAC definition
An example of the impact of flat caps on principal forgiveness is seen in Wisconsin. Although the Wisconsin Department of Natural Resources (WDNR) raised the flat cap from $500,000 to $1,500,000 per applicant per year in its FY2023 IUP for Drinking Water IUP, the continued use of a flat cap remains problematic and undermines equitable outcomes that would otherwise result from a strong DAC definition.
EPIC has proposed alternative mechanisms for distributing limited amounts of principal forgiveness among disadvantaged communities to result in more equitable distribution of principal forgiveness:
Equitably distribute principal forgiveness through 2-4 rounds until principal forgiveness is exhausted, with the amounts of principal forgiveness scaled.
Waive the cap on principal forgiveness …
In the event of unaffordable water rates or if taking on SRF loans would cause the applicant to exceed its debt limit.
Where water rates charged by the applicant water system already exceed the affordability threshold proposed by US EPA (greater than 2% of the 20th percentile household income).
Where the water system can demonstrate that water rates will be increased above the affordable water rate burden for proposed projects.
If the difference between the amount of principal forgiveness the applicant would be eligible for and the amount it would receive under the flat cap would require the applicant to borrow funds in excess of its debt limit.
To avoid the issue of larger communities gobbling up principal forgiveness while still removing the flat cap policy is to reserve a portion (##%) of principal forgiveness for smaller communities under a certain size, and allow the remainder for larger communities to be eligible for.
Acknowledgements
EPIC thanks the following organizations for their thought partnership in this work: the Alliance for the Great Lakes (the Alliance), Natural Resource Defense Council (NRDC), and West Virginia Rivers Coalition. The views expressed in this blog do not reflect the positions of these organizations.