USING THE STATE DRINKING WATER REVOLVING FUND TO

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

lead & copper

Issues Addressed: Public LSL replacement, Private LSL replacement,

Funding and Financing, Legal & Legislative

Considerations, Impact on low-income residents

Most Applicable

Community Types: All community types

Executive Summary:

In 2018, Michigan adopted a revised Lead and Copper Rule to protect public

health in the state by reducing lead exposure through drinking water. The

updated Rule reduces the “lead action level”, revises water sampling protocols,

and requires the replacement of all lead service lines (LSLs) within 20 years

This memo explores how other states have expanded and adapted their

Drinking Water Revolving Fund (DWRF) programs to facilitate LSL replacement.

Based on the ﬁndings on other state actions to replace LSLs, this memo

outlines several policy options that could be utilized to achieve full replacement

of LSLs in Michigan through the DWRF program. In addition to the policy

options, it is recommended that signiﬁcant additional funding should be

allocated to the DWRF to achieve full replacement of LSLs within 20 years

without negatively impacting vulnerable residents.

The Federal-State Drinking Water Revolving Fund Program

The DWRF is a ﬁnancial assistance program created in 1996 and administered

by the Environmental Protection Agency (EPA) to help water systems and

states achieve the health protection objectives of the Safe Drinking Water

Act. Congress annually appropriates funding for the DWRF. EPA then awards

capitalization grants to all 50 states and Puerto Rico for their DWRF programs

based upon the results of the most recent Drinking Water Infrastructure Needs

Survey and Assessment. The states contribute an additional 20 percent to

match the federal grants.

Photo by mrjn Photography on Unsplash

USING THE STATE DRINKING

WATER REVOLVING FUND

TO FACILITATE LEAD SERVICE LINE

REPLACEMENT IN MICHIGAN

State Case Studies & Recommendations

Local water suppliers may apply to the state for approval of an alternate schedule speciﬁed in an asset

management plan.

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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State DWRF programs function like infrastructure banks by providing low-

interest loans to eligible recipients for drinking water infrastructure projects.

Over time, as loans are paid back into a state’s DWRF, the state “revolves” the

funds and uses them to make new loans to other recipients. Eligible projects

typically include drinking water source, treatment, and distribution infrastructure

improvements and updates needed to protect public health.

The DWRF program gives states flexibility in administering their programs to

meet their unique needs. It allows states to provide various kinds of assistance

in addition to loans, including grants, principal forgiveness, and negative

interest rate loans. It also allows states flexibility to prioritize project lists

according to their own needs as long as they meet the requirements of the

Safe Drinking Water Act. States may also provide additional incentives or

favorable terms for projects in small or disadvantaged communities or certain

types of high-priority projects.

For more information about the DWRF program, see: https://www.epa.gov/

drinkingwatersrf

THE DRINKING WATER STATE REVOLVING FUND Protecting America’s Public Health for Over 20 Years

Infographic from EPA

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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Michigan’s Drinking Water Revolving Fund Program

The Michigan Department of Environment, Great Lakes, and Energy (EGLE,

formerly the Department of Environmental Quality) administers Michigan’s

DWRF program. Projects eligible for financing and other assistance include

both new construction and upgrades of existing systems, including LSL

replacement. Other projects may include improvements to wells, well

or intake structures, water treatment plants, storage tanks, pump stations,

transmission and distribution lines, security systems, and other related system

improvements.

Each year, EGLE solicits applications from water suppliers and creates a Project

Priority List, which ranks the projects expected to receive financial assistance

through the DWRF (PA 451 of 1994, Part 54). Federal law requires that the fund

give priority to projects that: address the most serious risks to human health,

are necessary to ensure compliance with the requirements of the federal Safe

Drinking Water Act, and that assist systems most in need according to the

state’s affordability requirements. The Project Priority List uses a point system

to award priority points based on federally-mandated criteria, as well as the

state’s additional criteria.

Under Michigan law, a maximum of 1,000 Priority Points are awarded for:

• Drinking Water Quality: Up to 450 points are assigned for projects that will

maintain compliance with or eliminate acute violations of drinking water

quality standards.

• Drinking Water Infrastructure Improvements: Up to 350 points are

assigned for upgrades to source water protection, treatment facilities,

transmission or distribution water mains, water storage facilities, and/or

pumping stations.

• Population Points: Up to 50 points are assigned based on the existing

population served by the water system, with more points awarded for

systems that serve larger populations.

• Disadvantaged Community: Up to 50 points are assigned to any municipal

water supplier qualifying as a “disadvantaged community” based on median

household income, poverty rate, and other criteria. (For the amended FY19

Intended Use Plan, Detroit, Bay City, Hamtramck, and Muskegon qualify as

“disadvantaged communities.”)

• Consolidation: Up to 100 points are assigned for projects that accomplish

consolidation of smaller, separate systems.

• Wellhead or Source Water Protection Plans: Up to 100 points are assigned

for communities that have completed approved wellhead protection or

source water protection programs.

MCL 324.5406 http://legislature.mi.gov/doc.aspx?mcl-324-5406

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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The Project Priority List (PPL) is then used to create an Intended Use Plan

which must be submitted to the EPA to request the allotted capitalization

grant for the year. Eligible projects that are not funded in a given year are

automatically prioritized according to the same criteria in the subsequent year.

• Recent Program Activity:

¡ In 2016, President Obama approved an emergency declaration for

the City of Flint, MI and signed legislation

to provide $100 million

in supplemental DWRF capitalization grants to replace LSLs (both

public and private side) and other critical water infrastructure in Flint.

Adding the $20 million state match, the EGLE plans to use the entire

$120 million as a loan with 100 percent principal forgiveness. These

supplemental funds are administered separately, have separate

eligibility criteria, and do not have any impact on the base DWRF

program.

¡ Recently, EGLE provided $9.5 million to 18 communities for a

Pilot Drinking Water Community Water Supply Grant program. The

grant program is funded by a state appropriation and provides funds to

help communities update their asset management programs, update

inventories of the types of service lines present in the distribution

system, and support full LSL replacement. For example, Grand Rapids

used a $1 million pilot grant to replace 200 of its approximately 24,000

LSLs. The pilot will provide guidance and lessons for LSL replacement

and asset management on a broader scale in the state.

¡ For FY 2019, the DWRF provides municipal borrowers 20 and 30 year

loans at 2.0% interest.

¡ Michigan’s total 2018 capitalization grant is $27,266,000 ($21,812,800

from the federal government with a 20% state match of $5,453,200).

Congress mandates that at least 20 percent of this amount be provided

as “additional subsidy to borrowers,” which Michigan will fulfill by

providing principal forgiveness to “disadvantaged communities” . After

set-asides for certain programs and administrative expenses, the

amount of the capitalization grant available for loans is $18,813,540.

¡ After subtracting the amount needed to service existing loans, DWRF

resources could support $169 million in new binding loan commitments

in FY 2019. The ﬁnal Project Priority List has 19 projects, totaling $248

million. Six projects, totaling $53 million, would like to proceed with

construction as noted on the PPL in FY 2019.

The thirteen remaining

projects, totaling $195 million, are eligible for funding in the future.

https://www.michigan.gov/documents/deq/deq-dwmad-mfs-DWRF-DWfunded-Final_632607_7.pdf

https://www.epa.gov/newsreleases/epa-awards-100-million-michigan-flint-water-infrastructure-upgrades

¡ Due to the underutilization of DWRF capacity for FY 2019, and in

response to increasing public concerns about drinking water

contamination, in December, EGLE issued a “second call” for DWRF

applications. In May, EGLE issued a draft amended Intended Use Plan

to reflect additional projects in Bay City, Hamtramck, Kalamazoo, and

Muskegon.

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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• Challenges with current structure:

¡ The fund currently has some excess capacity to ﬁnance eligible projects

and provide principal forgiveness for disadvantaged communities, but

would likely need signiﬁcant additional capacity (funding) to support LSL

replacement projects on a broader statewide scale, especially if the state

offered more direct grants and favorable incentives for LSL replacement.

¡ There are concerns that the DWRF is underutilized for several reasons:

§ The application process is onerous and costly.

§ Market interest rates are currently quite low, so there is little relative

advantage of DWRF loans versus other sources of capital.

§ Smaller communities (population 10,000 or less) often obtain more

favorable ﬁnancing terms from other federal sources such as the

USDA Rural Development program.

For more information about Michigan’s DWRF program, see: https://www.

michigan.gov/deq/0,4561,7-135-3307_3515_3517---,00.html

Photo by Anderson Rian on Unsplash

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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Redesigning the State’s Drinking Water Revolving Fund

Federal law gives states considerable flexibility in designing their DWRF

programs to meet their unique needs and priorities. Within the DWRF program,

there are several policy variables that may be adjusted to encourage greater use

of the DWRF for LSL replacement. Options include:

The following case studies provide examples of how other states have adjusted

their DWRF programs to facilitate LSL replacement in their communities.

• Priority Points: States have some discretion on how they assign priority

points beyond meeting the requirements of the federal Safe Water

Drinking Act. A state could assign priority points particularly for LSL

replacement projects.

• Interest Rates: States set the interest rates they offer for DWRF loans,

and many states, including Michigan, offer a single flat rate to all projects

in a given year. However, they have the ability to offer a wider variety of

options, including tiered rate structures, deferred interest, or different

rates for different kinds of projects.

• “Additional subsidization:” States can expand the use of “additional

subsidization” options in addition to direct loans, including:

o Principal forgiveness

o Grants

o Negative interest loans

o Bullet/balloon or ascending debt service structures

o Extended amortization periods (>30 years) for certain communities

• Eligibility requirements: States can condition eligibility for DWRF

funds on utilities taking certain actions on LSL inventories and

replacement.

Acr27522984851841458432.pdf 1 6/12/19 10:31 AM

• Repayment terms: States can create ﬂexible or customized repayment

schedules such as:

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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Case Studies - State Uses of DWRFs to Facilitate LSL

Replacement:

WISCONSIN

The Wisconsin State Legislature has taken action to make statutory changes

to allow communities to use water rates to pay for full LSL replacement

(private and public) and to earmark federal funding to support private LSL

replacement in high-need communities. As described above, federal law

requires that at least 20 percent of the DWRF capitalization grant be used

for “additional subsidization.” Wisconsin is using the majority of these

“additional subsidization” dollars for principal forgiveness for LSL replacement

in disadvantaged municipalities, and the Wisconsin Department of Natural

Resources (WDNR) has established the Private LSL Replacement Funding

Program. Wisconsin’s original DWRF program, WI Safe Drinking Water Loan

Program, continues to be available to make low-interest loans to Wisconsin

communities for LSL replacement and other water infrastructure projects.

Key Program Components:

• The WDNR established the two-year, $26.8 million grant program to

help disadvantaged municipalities pay for the private portion of full LSL

replacement projects. $13.8 million was awarded in FY17 and $13.0 million

was awarded in FY18.

• Communities may request up to $5,000 per line and may offer residents

full or partial coverage of the cost of replacing the private portion of the LSL.

Funds may be used for LSLs connected to private homes, pre-K-12 schools,

and licensed/certiﬁed day care centers, but not business or commercial

properties.

• The Wisconsin legislature passed separate legislation to authorize

communities to use water system funds to pay for the private portion of LSL

replacement and to increase water rates to pay for full replacement. The

Public Service Commission of Wisconsin regulates municipal water utilities,

overseeing and approving water rates.

Funding Sources:

• Private LSL Replacement Funding Program

• WI Safe Drinking Water Loan Program (SDWLP)

• Slight water fee increases at water system level

Impact on Water Rates:

It is expected water rates will increase slightly, but no number has been

estimated. (Water systems are currently assessing rate changes.) Unlike

Michigan, which has no central authority that reviews local water rates, the

Public Service Commission monitors and approves rates for local utilities.

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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Results:

Based on WDNR’s $3,000 per private replacement estimate, the base $26.8

million in funding currently allocated by the State will cover just under 9,000

homeowner-side LSL replacements. In 2016, the American Water Works

Association estimated that there were 240,000 LSLs in Wisconsin (including

lead goosenecks). It is unclear whether additional assistance will be made

available for the remaining LSLs.

While some communities are already planning and budgeting for LSL

replacement, replacement of all LSLs, both public and private side, could cost

more than a billion dollars, according to the WDNR.

INDIANA

In 2017, the Indiana Legislature passed legislation allowing the Indiana Utility

Regulatory Commission to approve a request from water utilities to fold the

cost of LSL replacement into rates paid by customers. To qualify, a utility

must submit a detailed plan and demonstrate the proposal is reasonable and

in the public’s interest. The Indiana Finance Authority, which manages the

State’s Drinking Water State Revolving Fund (SRF), also launched a “Lead Line

Replacement Incentive” to support full replacement of LSLs and galvanized

service lines. Eligible communities receive improved ranking on the DWSRF

priority list and interest rates as low as 0%. Indiana was also selected by EPA

for funding under the Water Infrastructure Finance Innovation Act (WIFIA)

program for a $436 million loan to provide additional support for the SRF.

Key Program Components:

• Indiana offers communities a sliding scale interest rate based on the

community’s household income and the post-project monthly user rate

charged. Rates currently range from 2.63% to 2.0% with lower rates offered

to lower-income communities and communities offering lower water rates

to customers. Rates are further reduced as low as 0% for LSL replacement

projects.

• LSLs are speciﬁcally identiﬁed as a “most serious risk to human health,”

thereby receiving additional priority points on the Project Priority List.

• The standard SRF loan period is 20 years. Up to 30 year loans may be given

for eligible disadvantaged communities. In 2017, Indiana received approval

from the EPA to offer extended term ﬁnancing up to 35 years for updating

aging infrastructure as long as the useful life of the asset matches or

exceeds the ﬁnancing period.

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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• In 2017, Indiana became the ﬁrst state to be selected by the EPA to receive

a $436 million loan under the Water Infrastructure Finance Innovation Act

(WIFIA). WIFIA ﬁnancing will supplement the Drinking Water SRF and the

Clean Water SRF programs, providing additional reach and capacity for the

programs and signiﬁcantly expanding the number of projects that will receive

ﬁnancing.

• Indiana has also developed a model methodology for mapping LSLs in the

state.

Funding Sources:

• Lead Line Replacement Incentive Program

• Indiana State Drinking Water State Revolving Fund (DWSRF) - (Fact Sheet)

• EPA Water Infrastructure Finance Innovation Act (WIFIA) program (funds to

the Indiana DWSRF)

• Water fee increases at water system level

Impact on Water Rates:

Water rates are expected to increase, but no number has been

estimated.

Results:

• An early success of Indiana’s new legislation to allow utilities to fold the cost

of LSL replacement into customer rates is the announcement from the

Indiana-American Water Company, one of Indiana’s largest private water

utilities, to enact the largest voluntary LSL replacement program in the

country. The plan will spread the cost of replacing 50,000 service lines across

the system’s 300,000 customers.

¡ The plan showed that having a single contractor handle the entire line

reduces the overall cost by 25 to 30%.

¡ 50,000, (approx ¼) of Indiana’s LSLs will be replaced in 10-24 years

¡ Indiana-American Water Company has also applied to the SRF for a $31.7

million loan for LSL replacement.

• Indiana is expected to close soon on its WIFIA loan with the EPA.

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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OTHER STATE USES OF STATE DRINKING WATER REVOLVING FUNDS

Ohio allows use of the DWSRF for 0% rate planning loans to map LSLs.

Ohio currently offers 0% rates for all planning loans, which can be used for

mapping the location of LSLs, among other planning functions. For more detail,

visit: https://epa.ohio.gov/Portals/29/documents/ofa/2018%20WSRLA%20

PMP%20May%2012.pdf

New Jersey allows use of the DWRF for principal forgiveness loans to

support replacement of LSLs. The Lead Service Line funding package provides

eligible projects 90% principal forgiveness and covers the remaining 10% with

interest-free loans up to 30 years. Applicants are limited to $1 million per year

and must serve communities with a median household income that is less than

that of the county in which they are located. For more detail, visit:

https://www.nj.gov/dep/dwq/pdf/NJEIFP_Funding_Booklet20170517.pdf

Virginia provides grants through the DWRF to support the replacement

of LSLs. The Lead Service Line Replacement program, within Virginia’s DWRF,

provides up to $5,000 in grant funds for each service line replaced on the

private side. For utilities that participate, the program rebates customers for the

cost of replacing the private portion of their LSL. For more detail, visit:

http://www.vdh.virginia.gov/content/uploads/sites/14/2016/12/02-Funding-

Announcement-letter.pdf

Connecticut and New Hampshire assign additional priority points for LSL

replacement. Connecticut recently increased the number of priority points that

can be awarded for LSL replacement projects in compiling the Project Priority

List. New Hampshire provides a generous amount of priority points for LSL

replacement projects. For more detail, visit:

• Connecticut Draft 2019 Drinking Water Revolving Fund Intended Use Plan:

https://portal.ct.gov/-/media/Departments-and-Agencies/DPH/dph/drinking_

water/pdf/2018_05_10_DR

• New Hampshire 2018 Drinking Water Revolving Fund Intended Use Plan:

FT_SFY2019IUP.pdf (https://www.des.nh.gov/organization/commissioner/pip/

publications/documents/r-wd-18-12.pdf)

Connecticut requires that any LSLs that are known or encountered as part

of a DWSRF-ﬁnanced water main project must be fully replaced. The utility

completing the project must obtain the consent of individual property owners

before replacing LSLs, and full replacement costs are eligible for DWSRF

funding. For more detail, visit:

https://portal.ct.gov/-/media/Departments-and-Agencies/DPH/dph/drinking_

water/pdf/2018_05_10_DRAFT_SFY2019IUP.pdf

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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Recommendations for Michigan:

Michigan’s policymakers should consider expansion of the DWRF program to

facilitate the full replacement of LSLs in Michigan. As an infrastructure bank,

the DWRF’s structures and policies provide an existing framework that can

accommodate LSL replacement projects throughout the state. In addition,

use of the DWRF can help resolve legal ambiguity regarding private-side LSL

replacement because DWRF funds have already been used in Michigan and

many other states for full LSL replacement.

Along with an infusion of new capital, the State should consider the following

options to amend the DWRF program to expedite LSL replacement:

1. Increase principal forgiveness. Increasing the availability of loan

forgiveness and grants, especially for low-income communities, will help

direct assistance where it is needed the most.

2. Creation of tiered, lower, or 0% interest rates. While current rates are

only 2%, the DWRF remains underutilized. The creation of tiered, lower

or 0% interest rates similar to what is being done in Ohio would increase

utilization of funds. Tiered rates could be tied to community need or post-

project water rates.

3. Expanded use of affordability criteria to better target the most

disadvantaged communities. Under current deﬁnitions, “disadvantaged

community” status is relatively narrow. The State could broaden the use of

income- and need-based criteria in the awarding of project priority points,

principal forgiveness, lower interest rates, or other ﬁnancial incentives.

4. Establishment incentives for water providers that replace LSLs at a

faster rate. Principal forgiveness or a reduced rate program could be offered

to water providers that replace LSLs at a faster rate than the current 20 year

requirement. For example, a water system that receives a $1 Million loan

with a 2% interest rate could be given a 1% interest rate if the replacement

of all LSLs is completed within 15 years instead of 20.

5. Establish incentives for reducing LSL replacement costs. Principal

forgiveness or 0% rates could be offered for LSL replacement up to a

certain threshold (e.g. $1,000 per LSL), with any remaining costs eligible for

standard 2% ﬁnancing. Implementing a threshold will reward communities

that can ﬁnd ways to reduce the costs of LSL replacement.

6. Establishment of incentive program for communities that take

ownership of and maintain private LSLs. Additional priority points,

principal forgiveness, or lower rates could be offered to communities that

take ownership of private LSLs. Water providers that own the private portion

of LSLs will be able to ensure better maintenance and more seamless

replacement of service lines.

Using the State Drinking Water Revolving Fund to Facilitate Lead Service Line Replacement in Michigan

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7. Revise DWRF eligibility criteria to encourage LSL replacement.

Following the example of Connecticut, Michigan could require that DWRF-

funded projects include replacement of any LSLs that are encountered

during the project.

8. Signiﬁcant additional funding should be allocated to the DWRF -- the

level of funding signiﬁcantly impacts how expeditiously LSLs would

be anticipated to be replaced. An expanded number of LSL replacement

projects, as well as increased reliance on principal loan forgiveness, grants,

and zero and low-rate loans will increase the capitalization needs of the

DWRF program. Signiﬁcant additional funding will be needed to ensure the

DWRF’s long-term solvency. The state could consider direct appropriations,

and it should also consider applying for a WIFIA loan, similar to Indiana.

Appendix

For further recommendations and implementation suggestions, please see page

16 of the following memo outlining recommendations from the Environmental

Financial Advisory Board.

Additional Information Regarding State Actions to Replace LSLs is

available from:

• Environmental Defense Fund

• Lead Service Line Replacement Collaborative (LSLC)

• Great Lakes Environmental Infrastructure Center

PROCESS-RELATED RESOURCES:

• Additional Information Regarding

Michigan Clean Water Revolving

Fund

• More information regarding the

Wisconsin WDNR funding programs

• Detailed Intended use plan WDNR

used to direct Federal funds

to Private Lead Service Line

Replacement Program

• Guidance on how Wisconsin made

changes to State policy to allow for

replacement of private portion of

LSLs

• Legislative summary memo outlining

legislation that changed LSL

regulations in Wisconsin

• Strategies to obtain customer

acceptance of complete LSL

replacement

45543 June 12, 2019