Understanding Set-Aside Funds: Strengthening Water Systems Beyond Infrastructure
The Drinking Water State Revolving Fund (DWSRF) is a critical resource for improving and maintaining safe drinking water systems in the U.S., ensuring communities have access to safe and reliable drinking water. While the program is best known for providing low-interest loans for infrastructure projects, another critical component often goes unnoticed—set-aside funds. These funds, carved out from federal capitalization grants, serve a vital purpose: strengthening public water systems beyond the physical construction of traditional water infrastructure projects.
What Are Set-Aside Funds?
Set-aside funds are portions of the DWSRF capitalization grants reserved for specific, non-construction activities. These funds empower states to address drinking water issues proactively, support system capacity development, and ensure compliance with the Safe Drinking Water Act (SDWA).
Each year, the Environmental Protection Agency provides capitalization grants to states to fund their DWSRF programs. While most of these funds go directly into infrastructure loans and principal forgiveness, states have the option to set aside up to 31% of their annual federal capitalization grant (including under each of the DWSRF Base, IIJA General Supplemental, and Emerging Contaminants programs) to support activities that improve water system capacity, compliance, and overall public health protection.
However, under the IIJA LSLR funds, the maximum set-aside amount is functionally limited to 26% (rather than 31%). This is because only 10% of the 15% Local Assistance Set-Aside can be used for any one activity and lead service line replacement-related activities only fall under one category (capacity development).
Since the use of set-aside funds is a discretionary policy decision made by state SRF administrators, there is considerable variation in how much states allocate from each federal capitalization grant, and how they use the set-aside funds. Some states utilize the full set-aside allowance, while others take less, prioritizing infrastructure loans instead.
How States Use Set-aside Funds
Eligible set-aside activities fall into four key categories:
Administrative and Technical Assistance (Up to 4%): Helps states manage their DWSRF programs, including oversight, reporting, and operational support. Funds technical assistance for public water systems of all sizes.
Small System Technical Assistance (Up to 2%): Provides hands-on, targeted support to small water systems serving populations of less than 10,000, providing training, and helping them maintain compliance and improve operations.
State Program Management (Up to 10%): Supports state drinking water programs, including source water protection, operator certification, water system capacity development, and compliance monitoring.
Local Assistance and Other State Programs (Up to 15%): Funds activities such as developing and implementing asset management plans, planning and implementation for regionalization or consolidation, source water quality protection efforts, and other local capacity development and technical assistance.
For additional information on set-asides, see the EPA’s Analysis of the Use of Drinking Water State Revolving Fund Set-Asides: Building the Capacity of Drinking Water Systems.
Why Set-aside Funds Matter
Accessing DWSRF funding and financing can be challenging, particularly for small and disadvantaged communities that may lack the technical, managerial, or financial expertise to navigate funding processes. While funds for construction are essential, set-aside funds play a critical role in bridging this gap, ensuring that communities have the necessary support to maintain compliance with federal and state drinking water standards, secure funding and financing, and ensure sustainable operations.
Among other uses, set-aside funds can be used for:
Building Water System Capacity: Many small utilities lack expertise in operations, financial planning, and asset management. Set-aside funds provide training, technical assistance, and financial guidance to help utilities become more self-sufficient.
Ensuring Regulatory Compliance: Meeting federal and state drinking water standards requires ongoing monitoring and enforcement. States use set-aside funds to offer compliance assistance, water quality monitoring, and enforcement support to help systems stay on track.
Funding Public Health Initiatives: Water safety extends beyond infrastructure. Set-aside funds support public outreach, risk mitigation, and consumer education to improve public health outcomes.
Providing Direct Assistance to Communities: Small and disadvantaged communities often face financial and technical barriers to securing DWSRF loans. Set-aside funds enable states to offer engineering support, planning assistance, and funding application guidance to help these communities succeed.
A Key Tool for Bolstering Sustainable Water Systems
While infrastructure investments are essential, long-term system sustainability depends on more than just physical upgrades. Set-aside funds bolster the long-term resilience of drinking water systems by equipping utilities and communities with the knowledge, resources, and support they need to manage their water services effectively and efficiently—at no cost to the water system.
For policymakers, it is important to understand that these funds provide a flexible and proactive tool to address water system challenges before they become crises, ensuring that communities—especially those with limited resources—can maintain safe and sustainable water supplies for generations to come.
By recognizing the power of set-aside funds and investing in set-aside activities, states can ensure that investments in water infrastructure go beyond construction to build stronger, smarter, and more resilient water systems nationwide.
Additional Resources
For more information on set-asides, see the following resources:
Technical Assistance Fact Sheet (Alliance for the Great Lakes, EPIC, PolicyLink, River Network)
About the Drinking Water State Revolving Fund (DWSRF) Set-Asides (EPA)