A-133 Compliance Supplement

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Capitalization grants are awarded to States to create and maintain State Revolving Funds (SRFs) to: (1) enable States to encourage construction of wastewater treatment facilities to meet the enforceable requirements of the Clean Water Act (Act), (2) increase the emphasis on nonpoint source pollution control and protection of estuaries, and (3) establish permanent financing institutions in each State to provide continuing sources of financing to maintain water quality. The SRF provides loans and other types of financial assistance (but not grants) to qualified communities and local agencies. The SRF is a permanent revolving fund to provide loans and other assistance (40 CFR section 35.3115).

The SRF program is established in each State by capitalization grants from the Environmental Protection Agency (EPA). Since the enabling legislation was enacted in 1987, capitalization grants have been available to States in most years. EPA implements the SRF in a manner that preserves a high degree of flexibility for States in operating their revolving funds in accordance with each State's unique needs and circumstances.

States are required to provide an amount equal to 20 percent of the capitalization grant as State matching funds in order to receive a grant. Capitalization grant applications shall include: (1) an Intended Use Plan (IUP), which lists proposed projects eligible for financing from SRF loans; (2) an identification of the source of the matching amount; (3) a proposed payment schedule; and, (4) certain certifications and demonstrations.

Legislation relating to the SRF program is in Title VI of the Act, and the regulations are in 40 CFR part 35, Subpart K.

In developing the audit procedures to test compliance with the requirements for a Federal program, the auditor should first look to Part 2, Matrix of Compliance Requirements, to identify which of the 14 types of compliance requirements described in Part 3 are applicable and then look to Parts 3 and 4 four the details of the requirements.

The audit focus is on a State's SRF program, rather than individual capitalization grants awarded to States by EPA.

1. The SRF may provide financial assistance: (1) to municipalities, inter-municipal, interstate, or State agencies for the construction of publicly owned treatment works, as defined in section 212 of the Act that are on the State's project priority list; (2) for implementing nonpoint source management programs under section 319 of the Act; and (3) for developing and implementing estuary management plans under section 320 of the Act.

a. Loans (not grants) and other authorized forms of financial assistance for qualified projects;

d. Guaranteeing of or using as a source of repayment for SRF debt obligations (providing that the net proceeds of the sale of such bonds are deposited in the SRF);

e. Loan guarantees for similar revolving funds established by municipalities or intermunicipal agencies; and

2. SRF funds may be used for the reasonable costs of administering and managing the SRF.

1. Loans - when the SRF receives a request from a loan recipient, based on incurred costs, including pre-building and building costs.

2. Refinance or purchase of municipal debt - generally, when at a rate no greater than equal amounts over the maximum number of quarters that payments can be made, and up to the portion of the LOC committed to the refinancing or purchase of the local debt.

4. Guarantees and security for bonds - immediately, in the event of imminent default in debt service payments on the guaranteed/secured debt.

5. Administrative expenses - cash can be drawn based on a schedule that coincides with the rate at which administrative expenses will be incurred (40 CFR section 35.3160).

States are required to deposit into the SRF from State monies, an amount equal to 20 percent of each grant payment. If the State provides a match in excess of the required amount, the excess balance may be banked toward subsequent match requirements. States generally report the total amount of their matching for a capitalization grant in an annual SRF report to EPA. The match is required to be made on or before the time that EPA funds are drawn (40 CFR section 35.3135(b)).

The maximum amount allowable for administering and managing the SRF is 4 percent of the cumulative amount of capitalization grant awards received. When the administrative expense of the SRF exceeds 4 percent, the excess must be paid from sources outside the SRF (40 CFR section 35.3120(g)).

"Grant Payments" from a capitalization grant shall begin in the quarter in which the grant is awarded, and generally end no later than 8 quarters after the grant is awarded (40 CFR section 3155(c)).

c. SF-271, Outlay Report and Request for Reimbursement for Construction Program - Not Applicable

The State must provide an Annual Report to EPA according to the schedule in the grant agreement (OMB No. 2040-0118). The report shall address how the State:

Compliance Requirement - The State must conduct reviews of the potential environmental impacts of all Section 212 construction projects receiving assistance from the SRF, including nonpoint source pollution control and estuary protection projects that are also Section 212 projects (40 CFR section 35.3140).

Audit Objective - Determine whether the State is performing environmental reviews before construction proceeds.

a. Inquire of SRF management about the environmental review procedures in place.

b. Select a sample of projects that began during the year to ascertain that the decisions were rendered prior to the project proceeding and were approved in the State environmental review process.

Compliance Requirement - A "binding commitment" is a legal obligation by a State to a local recipient that defines the terms for assistance under the SRF. Cumulative binding commitments must equal at least 120 percent of cumulative capitalization grant payments received one year earlier. Binding commitments requirements are intended to help assure that the State utilizes grant funds in a timely manner. EPA may withhold future payments and require adjustments to the payment schedules before releasing further payments if the State does not meet the binding commitment requirement. States generally report the total amount of their binding commitments in an annual SRF report to EPA (40 CFR sections 35.3135(c) and 35.3165(a)).

Audit Objective - Determine whether States have complied with the requirement to make binding commitments equal to or greater than 120 percent of the amount of the capitalization grants.

Review binding commitments in conjunction with the EPA payment schedules to ascertain if the State entered into cumulative binding commitments in an amount at least equal to 120 percent of the cumulative grant payments received 1 year earlier (i.e., cumulative binding commitments in the current year should be equal to or greater than 120 percent of cumulative grant payments made through the previous year).

Compliance Requirements - The State shall establish a separate account or series of accounts that is dedicated solely to providing loans and other forms of financial assistance. All loan repayments, including principal and interest, and interest earnings on investments, must be credited directly to the SRF. Repayment of loans shall begin within one year after project completion, and loans shall be fully amortized over not more than 20 years after project completion (40 CFR sections 35.3110(b) and 35.3120(a)).

Audit Objectives - Determine whether the State has a separate account or series of accounts for the SRF. Determine whether principal and interest payments, and interest earnings on investments, were properly credited to the SRF.

a. Ascertain if the SRF is a separate account, or series of accounts, dedicated solely to purposes of the program.

b. Test a sample of projects funded by the SRF and for which repayments were due during the year to determine that principal and interest payments were properly credited to the SRF accounts.

c. Test a sample of loan agreements and other project records to ascertain if the repayments began within one year of project completion and the loans are scheduled for full amortization within 20 years.

d. Obtain a list of investments made during the year and ascertain if earnings on investments were properly recorded in the SRF.

Compliance Requirement - To use the SRF as security or a source of revenue for the payment of principal and interest on revenue or general obligation bonds issued by the State, the net proceeds (i.e., funds raised from the sale of bonds minus insurance costs) of the sale of such bonds must be deposited in the SRF (40 CFR section 35.3120(d)).

Audit Objective - Determine whether the State placed the net proceeds from the sale of bonds guaranteed by the SRF into the SRF.

Review bond documentation and trace amounts qualifying as net proceeds to accounts in the SRF.