Reforming State SRF Policies: Lessons Learned from Advocacy in Wisconsin
By Janet Pritchard, Senior Advisor for Water Law and Policy
Introduction
Attention to the water sector has never been so high due to the influx of funds from the Infrastructure Investment and Jobs Act (IIJA). An injection of federal funding into the Clean Water and Drinking Water State Revolving Funds (SRFs) to help address backlogged water infrastructure needs has spurred interest in SRFs. Advocates concerned about protecting clean waterways and ensuring access to safe, affordable drinking water are starting to learn about SRFs and working to ensure these funds reach small and historically overburdened communities, many of whom have not received an equitable share of SRF funds in the past.
Advocates in Wisconsin have made a head start. Milwaukee Water Commons (MWC) and other advocates affiliated with the Coalition on Lead Emergency (COLE) started engaging state policymakers in June 2021 regarding state policies that determine how assistance from Wisconsin’s Drinking Water SRF is allocated across communities within the state. Since January, EPIC has been supporting these efforts with legal and technical expertise.
This blog summarizes key takeaways from Wisconsin advocates’ first year of engagement on SRF state policies:
Lesson 1: Commenting on the IUP is just a first step – Persistent advocacy, collaborative engagement of state SRF Administrators, and clarifying specific expectations can achieve meaningful policy reforms.
Lesson 2: Reforming the state’s definition for “disadvantaged communities” to identify communities eligible for principal forgiveness is only part of the solution – Other state policies that determine how principal forgiveness is allocated to communities can undermine equitable outcomes.
Lesson 3: States need to consider more equitable alternatives to flat caps on principal forgiveness.
Lesson 4: State-level advocacy is strengthened through collaboration across coalitions of in-state advocates with a track record working on the issues of concern.
Background
The federal government provides most of the seed funding for SRFs, through federal capitalization grants allocated to the states based upon the Clean Watershed Needs Survey and Drinking Water Infrastructure Needs Survey and Assessment. Decisions about which communities receive SRF assistance, however, and whether assistance will be provided as loans, technical assistance, grants, or principal forgiveness (PF), is determined at the state level. For example, Congress mandated that 49% of funds appropriated through IIJA for the general Clean Water and Drinking Water SRFs as well as additional funding designated for lead service line replacement must be provided as grants or forgivable loans to “disadvantaged communities” (DACs). How disadvantaged communities are defined is largely left up to state policymakers, however.
Accordingly, advocates need to engage state policymakers in order to influence the policies that determine which communities will benefit from the IIJA’s historic influx of funding to the SRFs. A key focus for advocacy will be state Intended Use Plans (IUPs). As a condition of receiving each federal SRF capitalization grant allotted to a state, the state must adopt an Intended Use Plan (IUP) following public notice and comment. Under federal law, IUPs must include information about:
whether the state intends to set aside any funds from the federal capitalization grant for administration and/or technical assistance and how set aside funds will be used.
who is eligible to apply for and to receive SRF assistance.
how much of the federal capitalization grant will be provided as additional subsidization to communities receiving SRF assistance. This will typically be in the form of principal forgiveness, but could also be in the form of grants or negative interest loans.
the policies that determine who is eligible for additional subsidization and how additional subsidization will be allocated.
a Project Priority List (PPL) indicating the projects that are awarded SRF assistance and the kind(s) of amount(s) of assistance awarded for the proposed project.
To meet these requirements, the IUP needs to explain the state policies that dictate how the state will allocate SRF assistance. Relevant policies include, but are not limited to, how the state defines disadvantaged communities or affordability criteria to identify communities eligible for additional subsidies. Other policies that determine how additional subsidies are distributed such as how projects are ranked and any caps imposed on the amount of additional subsidy each applicant can receive will also be indicated in the IUP.
Most often, the IUP is the document through which the state adopts these policies. (If the distribution of SRF assistance is controlled by state statutes or regulations, or if the state agency responsible for administering SRFs chooses to model policies adopted in the IUP on statutory or regulatory language, this will be indicated in the IUP.) Thus, the IUP is the first place to look for advocates seeking to identify policies that will determine who benefits from SRFs, and policy reform efforts will likewise focus on IUPs.
Case study: Lessons from one year of SRF policy advocacy in Wisconsin
Lesson 1: Commenting on the IUP is just a first step – Persistent advocacy, collaborative engagement of state SRF Administrators, and clarifying specific expectations can achieve meaningful policy reforms.
In June 2021, MWC and COLE submitted formal comments on the Wisconsin Department of Natural Resources (WDNR) Draft DWSRF IUP for FY2022. WDNR did not modify the FY2022 IUP, however. WDNR noted that it had never previously received substantive comments on a Draft IUP and argued that, by the time the Draft IUP was published, expectations built on the policies proposed in the Draft had already been set. However, WDNR staff assured advocates that they would take issues raised in the June 2021 comments into consideration when preparing the DWSRF IUP for FY2023. Over the following year, COLE leaders, supported by EPIC, engaged in a series of meetings with WDNR’s SRF team.
The June 2021 comments provided a clear framework for the policy reforms to be explored. Even so, these meetings seemed to stall over the first several months of engagement. WDNR staff repeatedly expressed their interest in the equity issues raised, but failed to offer any concrete policy responses to address specific concerns highlighted in the June 2021 comments. To regain momentum, push WDNR to prioritize equity issues, and ensure that we would have an opportunity to review and respond to policies planned for the FY2023 Draft IUP prior to its publication, we pushed WDNR staff to agree to a timetable for presenting policy reform proposals to us. WDNR shared draft policy reforms being considered for the FY2023 IUP with us over March - May, according to the agreed timetable leading up to the anticipated publication date of the Draft FY2023 IUP in June 2022. We convened meetings with WDNR to provide feedback on the draft proposals and also replied with written feedback in letters dated April 25 and June 7.
When the Draft DWSRF IUP for FY2023 was published on June 13, 2022, the influence of our advocacy and engagement with WDNR was apparent. In general, it was clear that WDNR had taken on many of the concerns we raised, as indicated by several meaningful, equity-oriented policy reforms included in the new IUP.
👍 The new IUP includes major improvements to how disadvantaged communities (DACs) are defined for the purpose of determining eligibility for PF:
The improved methodology
considers the prevalence and severity of poverty, unemployment rates, and population decline as well as community size and median household income.
awards points for these factors based on sliding scales
applies appropriate weighting to these factors.
The scaled point system allows DACs to be ranked according to their level of disadvantage, based upon a cumulative score for several relevant factors. Wisconsin then uses these scaled DAC scores to make water systems serving the most disadvantaged communities eligible for a higher percentage of project costs as PF.
👍 The new IUP introduces changes to the Project Evaluation and Ranking Formula (PERF) used to rank projects on the state’s Project Priority List (PPL). These changes will elevate projects serving low-income communities and projects that remove lead service lines within the PPL, compared to previous versions of the PERF.
More PERF points for projects that remove lead service lines.
A change to how points for Financial Need are calculated. In prior IUPs, only very small communities could receive PERF points for Financial Need. Under the new system, larger communities with high poverty rates will also receive points.
👍 The new IUP articulates new goals related to using DWSRF investments to advance equitable workforce development, water affordability, sustainability, and climate resilience.
WDNR should now provide technical assistance to water systems to help them understand how to make progress towards these goals.
Future IUPs should also include incentives for water systems to implement these goals. Incentives could take the form of bonus PERF points and/or bonus PF, tools Wisconsin has already used in prior IUPs to incentivize other goals.
👍 WDNR is making ample use of allowed set-asides from Wisconsin's federal DWSRF grants for technical assistance to small and disadvantaged communities and for state program administration in ways that will benefit small and disadvantaged communities and the environment.
Lesson 2: Reforming the state’s definition for “disadvantaged communities” to identify communities eligible for principal forgiveness is only part of the solution – Other state policies that determine how principal forgiveness is allocated to communities can undermine equitable outcomes.
Notwithstanding these notable improvements, the imposition of flat caps on the amount of principal forgiveness (PF) each water system can receive remains a major problem.
👎 The new IUP still imposes a flat cap on the amount of PF each applicant can receive per year. Although the new IUP raises the cap on PF from $500,000 to $1,500,000, this is still a flat cap. As such it severely undermines the equity gains that would otherwise be achieved through the improved methodology for PF eligibility.
For example, under the new methodology, Milwaukee should be eligible to have 60% of its project costs covered by PF. Under the flat cap, however, Milwaukee would in fact receive only about 2% of its project costs as PF based on the cost of projects to replace water mains and lead service lines that have been proposed by Milwaukee for FY2023 SRF assistance. At the same time, smaller communities with smaller projects would still receive the full amount of PF for which they are eligible, even if they are less disadvantaged than Milwaukee.
Under the state’s improved definition of DACs, Wisconsin’s determinations of PF eligibility is much more equitable than in prior years. However, due to the continued imposition of flat caps on PF, the distribution of PF remains inequitable in Wisconsin.
Wisconsin provides an excellent case study to illustrate that a good DAC definition for PF eligibility is only part of the solution. Unless other policies that affect how PF is distributed – including PF capping and ranking policies – are also revised to ensure the equitable distribution of SRF assistance, inequitable outcomes can still be expected even if an improved DAC definition is adopted by the state.
Lesson 3: States need to consider more equitable alternatives to flat caps on principal forgiveness.
To ensure that the integrity of the proposed methodology for distributing PF is retained while also recognizing that there may not be enough PF available to award PF to every community to the level for which it is eligible under Wisconsin’s affordability criteria, EPIC proposed several alternatives to Wisconsin’s flat cap on PF in comments on Wisconsin’s FY2023 IUP for its Drinking Water SRF as well as comments on Wisconsin’s FY2023 IUP for its Clean Water SRF challenging a similar flat cap policy.
Alternative 1: Equitably distribute PF through several rounds until PF is exhausted. Available PF could be distributed to eligible applicants over 2 to 4 rounds of PF distribution. For example, if PF were distributed over the course of 3 rounds, each community could be awarded an amount equal to 1/3 of the percentage of project costs for which the community is eligible. So, if under Wisconsin’s affordability criteria a community is eligible for up to 30% of its project costs as PF, it would be awarded PF in the amount of 10% of project costs in round 1, another 10% of project costs in round 2, and the final 10% of project costs in round 3 (if PF is still available).
Alternative 2: Waive the cap on PF in the event of unaffordable water rates or if taking on SRF loans would cause the applicant to exceed its debt limit. US EPA recommends prioritizing PF for systems where combined water and sewer drinking water rates are greater than 2% of the 20th percentile household income (i.e., the lowest quintile of income for the service area).
Where water rates charged by the applicant water system already exceed the affordability threshold proposed by US EPA, WDNR should waive the flat cap on PF. In addition, an applicant water system should be able to anticipate where the rate increase needed to pay for the proposed water project would require water rates to be increased above the affordable water rate burden threshold. Where the water system can demonstrate that this would be the case, the flat cap on PF should likewise be waived.
The cap should also be waived where the difference between the amount of PF 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.
Alternative 3: Reserve a portion of general PF for small communities, with the remainder of general PF available to large and small communities alike. The flat cap proposed by WDNR is likely motivated by concern that, in the absence of the cap, all of the available general PF could be gobbled up by just a few large projects, leaving no general PF remaining for small communities that struggle to pay for needed water infrastructure projects. To address this concern without systematically undermining an equitable allocation of general PF to larger water systems that qualify for a substantial amount of general PF per WDNR’s proposed methodology, WDNR could reserve a portion of General PF for small, rural systems – up to as much as 70% of available general PF – with remainder available to large and small systems alike without the imposition of a flat cap.
Lesson 4: State-level advocacy is strengthened through collaboration across coalitions of in-state advocates with a track record working on the issues of concern.
Advocacy to reform Wisconsin’s SRF policies to ensure more equitable allocation of assistance from the state’s Drinking Water SRF was undertaken through a coalition of groups affiliated through COLE who have been working persistently over recent years to secure safe drinking water for Wisconsin communities, with EPIC providing legal and technical assistance to analyze existing state policies and develop policy recommendations.
EPIC is also convening a coalition of groups with track records working to protect the waterways and build climate resilience in Wisconsin to draft and submit comments on the Draft IUP for Wisconsin’s Clean Water SRF released on July 29, 2022. EPIC brings its policy analysis and insights developed through working on these issues across several Great Lakes states to the table, and in-state partners bring their insights on state-specific needs, relationships, past efforts, and on-going challenges.
Comments we have drafted over recent months in response to Clean Water and Drinking Water IUPs released by Illinois and Ohio similarly engaged in-state partners to inform and vet EPIC’s analysis of each state’s SRF policies and policy recommendations. We also plan to respond to Draft IUPs released in Indiana, Michigan, and Minnesota, as well as amendments to Drinking Water IUPs detailing new programs to utilize federal funding appropriated for lead service line replacement through the IIJA, over upcoming months in collaboration with in-state advocates. If you are interested in participating in these efforts in one of our Great Lakes focus states, please reach out to Janet Pritchard at janet@policyinnovation.org.
EPIC’s comments on state IUPs detailing our policy recommendations can be accessed through links in this spreadsheet, tracking advocates engagement on IUPs.
Conclusion
The substantial improvements in Wisconsin’s FY2022 DWSRF IUP to FY2023 demonstrate that advocacy to reform state SRF policies can be effective, even if results are not immediate. The dialogue developed between COLE leaders and WDNR also provides a foundation for continued advocacy and improvement.
Generally, SRF administrators have received little engagement in the IUP process. Consistent engagement in the public comment process and collaborative work with SRF administrators by Milwaukee Water Commons, COLE, and EPIC has laid the groundwork for ongoing reform of Wisconsin’s SRF policies to achieve more equitable outcomes – that is, to ensure that SRF assistance, including principal forgiveness, is prioritized for the communities most in need. This advocacy provides a model that can be replicated in other states.