Are More Drinking Water Funds Going to State-defined Disadvantaged Communities Through State Revolving Funds? (Answer: Be Patient!)
By Janet Pritchard, Phil Cork, & Maureen Cunningham
The Justice40 Initiative was launched in the early days of the Biden-Harris Administration in 2021, as an ambitious plan to address prior inequities and injustices by directing 40 percent of the overall benefits of certain federal investments towards historically marginally and overburdened communities. The Environmental Policy Innovation Center (EPIC) started to look into the progress of Justice40 almost as soon as the initiative was launched, most recently in a 2023 report where we compiled the results of several interviews with state agency staff who sit at the crossroads of federal funding for underserved communities and utilities.
Tracking federal funding should also provide answers on how the federal government has done in getting federal water infrastructure funds to underserved communities, specifically by taking a look at funding provided through the Infrastructure Investment and Jobs Act (IIJA), also known as the Bipartisan Infrastructure Law (BIL), including funds administered by states through the Drinking Water State Revolving Funds (DWSRFs). BIL provided supplemental funding for general drinking water projects, lead service line replacement (LSLR), and emerging contaminants. This law directs 49 percent of the funds appropriated for supplemental State Revolving Funds (SRFs) to state-defined disadvantaged communities (DACs) as grants or forgivable loans (called principal forgiveness). (1)
A closer look at DWSRFs and BIL funding will start to yield some answers on questions such as: Are more DWSRF funds going to state-defined DACs? and What is the impact of the additional principal forgiveness on the distribution of DWSRFs generally, since these funds include not only the additional infusion of BIL funds but also the base capitalization grants that are appropriated each year along with state matching funds and principal and interest repayments from prior DWSRF loans? (2)
These important questions can only really be answered with certainty after the states and EPA release data on which SRF applications have resulted in finalized SRF funding agreements between the state SRF agency and the local project applicant. Fortunately, EPA recently released an update to its SRF Public Portal that includes, for the first time, information on the first year of BIL funds. (3) EPIC is analyzing this data and comparing it with the data EPIC has been collecting on projects that states intended to fund when they drafted their Intended Use Plans (IUPs) and Project Priority Lists (PPLs) related to these funds.
If states comply with the BIL requirement to provide 49 percent of the BIL grants as grants or principal forgiveness to state-defined DACs, and if state DAC definitions direct these additional subsidies towards historically marginally and overburdened communities – the intended beneficiaries of Justice40 – then we can safely assume that Justice40 goals will be fulfilled in relation to the supplemental DWSRF funds provided by BIL. But determining whether states are providing a greater proportion of their total available DWSRF funds to DACs becomes complicated because, as noted, states allocate not only their new federal SRF grants each year, but also state matching funds and the revolving funds built up from principal and interest repayments. Even if we can say that states are providing more assistance to DACs in terms of the volume of assistance provided or the terms of assistance provided, pointing to the proportion of funds going to DACs might present a misleading picture. This may be especially true where states successfully leverage their funds to provide more SRF loan assistance overall - in this case, the proportion of assistance to DACs might fall relative to total assistance offered by the program, even where DACs are clearly being prioritized for the most favorable terms and receiving a higher volume of assistance relative to past years.
Having said all that, EPIC's initial analysis of states’ intended use of funds tells us the following:
Nine states (Florida, Iowa, Kansas, Kentucky, New Jersey, North Carolina, Rhode Island, South Carolina, and Virginia) do not indicate in their plans which project applicants qualify as DACs, and another eight states provide this information for some, but not all, projects.
Looking at the states/projects for which the DAC status is indicated, we can say the following:
Of 2,130 projects across 41 states that are expected to be funded out of the first funding cycle to include BIL grants and for which we know the DAC status:
53% of the projects are for DACs, and these projects are expected to receive 45% of the total funding allocated.
47% of the projects are for non-DACs, and these projects are expected to receive 55% of the total funding allocated.
Based on this subset of projects, we can anticipate that state-defined DACs will receive 45% of $7.96 billion awarded by this subset of states in the first SRF funding cycle that includes the award of BIL grants.
These numbers are represented in Figures 1 and 2 below.
Figure 1: Distribution of expected projects in State Fiscal Year (SFY23), the first year of BIL funding: non-DAC and DAC
Figure 2: Distribution of expected funding in State Fiscal Year (SFY23), the first year of BIL funding: non-DAC and DAC
Breaking this data set down by the type of project, we can say that state-defined DACs are anticipated to receive the following (depicted in Figure 3 below):
40% of funds going to general drinking water projects
39% of funds going to emerging contaminants projects
76% of funds going to lead service line projects
Figure 3: Distribution of expected funding in State Fiscal Year (SFY23), the first year of BIL funding: non-DAC and DAC and project type (general, emerging contaminants, lead service lines)
It appears that states are intending to award substantially more SRF assistance to state-defined DACs in the first year of BIL funding than they have in prior years. We can surmise from this data that the percentage of total DWSRF project awards going to DACs may be shifting from 27 percent (4) pre-BIL to something in the range of 53 percent, and that DACs might be expected to receive something in the range of 45 percent of the total DWSRF funds awarded as compared to 37 percent (5) pre-BIL.
The percentage of LSLR projects, and total funds, awarded to DACs appears to be even greater - in the range of 76 percent to state-defined DACs. Note, however, that many states are drawing their DAC definitions for LSLR projects more broadly than for general DWSRF projects, particularly with an eye to being able to include underserved neighborhoods in heavily lead-burdened cities that might not otherwise qualify as DACs. Also, the LSLR and EC funds do not include state matching funds, principal and interest repayments, or leveraged funds, so this data relates solely to the allocation of the new LSLR and EC funds appropriated by BIL.
In addition, there’s another important question pending: To what degree will states’ intentions to provide a more substantial share of SRF funds to DACs be realized in finalized agreements? EPIC is concerned that some DACs are falling out of the project pipeline between the project award stage (as reflected in Intended Use Plans) and the award finalization stage (as reported in the EPA data portal). But how extensively is this happening - and why? These questions are a focus of EPIC’s work in tracking SRF funding over the remainder of the BIL years.
All that to say, this work is ongoing... We have many years to sift through this information and learn more. The lesson here and the answer to the question of whether DACs are benefitting? Be patient - EPIC is in it for the long haul!
(1) In the case of the supplemental funds for emerging contaminants, 100 percent of the funds must be provided as grants or principal forgiveness, with 25 percent of this to state-defined DACs.
(2) The bulk of funding and financing awarded by SRFs comes from dollars that have revolved back into the funds from principal and interest repayments from prior SRF loans over the decades SRFs have operated. Some states further expand the amount available for new loans by leveraging the SRF.
(3) The recent information release reports SRF funding agreements finalized between state SRF agencies and local project applicants in 2023. This is the first update to the portal that includes finalized agreements allocating the first year of BIL funds to projects. States will continue to finalize agreements that allocate these BIL funds, however; the recent update does not account for all of the funds appropriated for the first year of BIL.
(4) This percentage is derived from comparing EPIC’s SFY23 data on intended DWSRF awards to the total number of agreements in the EPA Portal prior to State Fiscal Year (SFY) 2023 based on state-defined DAC status.
(5) This percentage is derived from comparing EPIC’s SFY23 data on intended DWSRF awards to the total Initial Agreement Amounts for all agreements in the EPA Portal prior to SFY23 based on state-defined DAC status.