New Infrastructure Law Brings Significant Investments in Drinking Water and Wastewater Infrastructure

Most of the water infrastructure dollars will flow through the Drinking Water State Revolving Fund (DWSRF) and the Clean Water State Revolving Fund (CWSRF) (collectively, SRFs), programs administered by the EPA and used by states to provide low-cost financing for local water projects. The IIJA’s appropriations for FY22 through FY26 for the SRFs represent a substantial increase over regular annual appropriations for these programs. For example, between FY17 and FY21, annual federal appropriations provided an average of $1.1B annually for the DWSRF. The IIJA increases funding for DWSRF programs to an average of $6.14B per fiscal year, nearly six times the level of recent annual appropriations for this program.

Notably, the IIJA funds are supplemental to dollars that have been or will be provided through the regular annual federal budget and appropriations cycle and through emergency packages recently enacted in response to the COVID-19 pandemic. Congress continues to negotiate FY22 regular appropriations, but the House-passed appropriating legislation (still subject to consideration by the Senate) provided $1.36B for DWSRF programs and $1.87B for CWSRF programs. Further, the America Rescue Plan Act, enacted in March 2021, provides $350B in grants for state and local governments for COVID-19-related purposes, which can include water infrastructure investments.

Announcements from the EPA indicate that the IIJA water infrastructure funds will be disbursed and put to use quickly. In early December, the agency announced estimated 2022 state allotments of IIJA money through the SRFs and noted that national program guidance—which will instruct the states on how to use this funding—will be issued soon. (The announcement can be found here.) The EPA has specified that program goals include (1) targeting resources to disadvantaged communities, (2) getting rid of lead pipes, and (3) addressing PFAS and other emerging contaminants.

IIJA water investment funding will be distributed mostly through formula grants to states. In late January, the Biden Administration advised water utilities, nonprofits, drinking water providers, and other potential recipients to begin working with local stakeholders and state program contacts to identify potential projects.

The significant expansion of funding is expected to spur water projects across the nation and result in flow-down opportunities for private sector vendors, suppliers, contractors and investors. An overview of key IIJA water investments follows.

SAFE DRINKING WATER INVESTMENTS

DWSRF Investments
The DWSRF is a federal program administered by the EPA designed to help public water systems finance a wide range of infrastructure projects, including projects to replace transmission and distribution pipe, install or upgrade water storage tanks, construct new water systems, and upgrade facilities to improve drinking water quality.

Under the program, states receive annual capitalization grants for their revolving loan funds used to provide low-interest loans and other financial assistance to water systems. Funding is allocated to states based on the results of the EPA’s Drinking Water Infrastructure Needs Survey and Assessment, which collects and categorizes the infrastructure investment needs of the nation’s various water systems.

The new infrastructure law provides the following DWSRF investments:

• $15B over five (5) years to the DWSRF for lead service line replacement

The IIJA fully appropriates $15B between FY22 and FY26 to be disbursed to states through the DWSRF for lead service line replacement. Of these funds, 49 percent will be provided to communities as grants or principal forgiveness loans and 51 percent will be available to communities for low-interest loans. A state match is not required to access these funds.

• $11.7B over five (5) years to the DWSRF

The IIJA fully appropriates $11.7B between FY22 and FY26 to be disbursed to the states through the DWSRF for other needed water infrastructure investments. Of these funds, 49 percent will be provided to communities as grants or principal forgiveness loans and 51 percent will be available to communities for low-interest loans. Further, the state matching requirement—which had previously been set at 20 percent of grant funds—has been reduced to 10 percent for FY22 and FY23.

• $4B over five (5) years to the DWSRF for emerging contaminants

The IIJA fully appropriates $4B between FY22 and FY26 to be disbursed to the states through the DWSRF to address emerging contaminants in drinking water. The law directs states to focus on PFAS remediation projects. All funds are to be provided to communities as grants or principal forgiveness loans. A state match is not required to access these funds.

Small, Underserved, and Disadvantaged Communities Grant Program
The new infrastructure law also expands and funds the Small, Underserved, and Disadvantaged Communities Grant Program, which assists public water systems in certain communities to meet Safe Drinking Water Act requirements.

Like the DWSRF allocations, the infrastructure law provides a large increase in funding for this program over previous annual appropriations. Specifically, in FY2021, the final amount available to the program—administered across the nation—was $25.8M. Under the new law, the program is set to receive $5B between FY22 and FY26.

Funds provided through the infrastructure law are to be provided as grants and used to remediate PFAS in drinking water. A state match is not required to access these funds.

CLEAN WATER INVESTMENTS

CWSRF Program Investments
Under the CWSRF program, the EPA provides capitalization grants to states to fund a range of water-related projects, including construction of wastewater facilities and wastewater treatment systems, nonpoint source pollution management, estuary program projects, and measures to manage stormwater or subsurface drainage water. Using grant funds, states provide low-interest loans and other forms of financial systems to local entities.

The new infrastructure law provides the following CWSRF investments:

• $11.7B over five (5) years to the CWSRF

The IIJA fully appropriates $11.7B between FY22 and FY26 to be disbursed to the states through the CWSRF. Of these funds, 49 percent will be provided as grants or principal forgiveness loans. The state matching requirement—which had previously been set at 20 percent of grant funds—has been reduced to 10 percent for FY22 and FY23.

• $1B over five (5) years to the CWSRF for emerging contaminants

The IIJA fully appropriates $1B between FY22 and FY26 to be disbursed through the CWSRF to be used for eligible activities that address emerging contaminants in accordance with the Federal Water Pollution Control Act. Of these funds 100 percent will be provided as grants or principal loan forgiveness. A state match is not required to access these funds.

DWSRF/CWSRF Buy America Provisions
The EPA requires that all public water system projects funded by a DWSRF assistance agreement and treatment works projects funded by a CWSRF assistance agreement comply with the “American Iron and Steel” (AIS) requirement. The AIS provision requires assistance recipients to use iron and steel products that are produced in the United States for the construction, alteration, maintenance, or repair of a public water system or treatment works. The requirement covers the following listed products made primarily (i.e., where cost of iron/steel is over 50 percent of the material cost of the product) of iron and steel that are permanently incorporated in the project:

(i)  Lined or unlined pipes and fittings
(ii)  Manhole covers and other municipal castings
(iii)  Hydrants
(iv)  Tanks
(v)  Flanges
(vi)  Pipe clamps and restraints
(vii)  Valves
(viii)  Structural steel
(ix)  Reinforced precast concrete
(x)  Construction materials

The EPA requires that the iron and steel product is produced in the United States, meaning that all processes for the manufacture of the product take place domestically. This would cover melting, refining, forming, rolling, drawing finishing, fabricating, coating and assembly but excludes metallurgical processes involving refinement of steel additives. In the case of precast concrete, the EPA requires that the casting of concrete occur domestically; however, raw materials such as iron ore, limestone, cement and non-iron and steel components of a primarily iron and steel product (e.g., non-iron/steel components of hydrants or valves) do not need to be produced in the United States and can be foreign sourced.

The IIJA has further strengthened domestic content preferences in federally funded procurements by requiring that iron and steel, manufactured products and construction materials used in such projects are produced in the United States. While the EPA’s existing AIS requirements would generally fulfill the iron and steel domestic manufacturing mandate under the IIJA, a similar mandate did not previously exist for non-iron and steel manufactured products or construction materials used in DWSRF- and CWSRF-funded projects. It is unclear whether the EPA will be required to extend the IIJA mandate on non-iron and steel manufactured products or construction materials to DWSRF and CWSRF projects. EPA obligation in this regard will become clearer in the coming days. The Office of Management and Budget (OMB) will likely issue additional guidance soon ahead of the May 14, 2022, deadline for implementation of IIJA specific domestic content rules. Should the EPA be required to extend the IIJA mandate to non-iron and steel manufactured products or construction materials, it will mean requiring that the non-iron and steel product is manufactured in the United States and cost of components manufactured in the United States is over 55 percent of the total cost of all components of the product. For construction materials, all manufacturing processes for the construction material would need to occur in the United States.

Pillsbury continues to monitor any developments in the domestic content and manufacturing requirements administered by the EPA following the enactment of the IIJA.

ADDITIONAL WATER INVESTMENTS

The IIJA also authorizes FY22 through FY26 funding (to be allocated through the regular appropriations cycle) for various existing water infrastructure funding, establishes new agency water-related initiatives (like establishing a study on stormwater management best practices), and funds other water-related programs and priorities across other agencies and sectors. For example, the law:

• Appropriates $1.15B over five (5) years to fund feasibility studies and construction of previously approved for water storage, groundwater storage, and conveyance projects, including small-scale storage and groundwater projects.
• Appropriates $1B over five (5) years for water recycling and reuse projects authorized in accordance with the Reclamation Wastewater and Groundwater Study and Facilities Act, as well as a competitive grant program for large-scale water recycling and reused programs.
• Establishes the Midsize and Large Drinking Water System Infrastructure Resilience and Sustainability program, under which the EPA will award competitive grants to public water systems to (a) increase resilience to natural hazards and extreme weather and (b) reduce cybersecurity vulnerability. The IIJA authorizes $250M over five years to be appropriated through future regular appropriations cycles.

The influx of new funding reflects increased national attention on the condition of the country’s water infrastructure and the challenges faced by local communities in maintaining these critical systems. The funding will lead to the initiation of new—sorely needed—projects and an expansion of existing projects, creating demand and opportunities for public and private sector stakeholders.

Pillsbury continues to work closely with our clients to help them to identify opportunities, partner with states and localities, and navigate federal and state regulatory requirements associated with federally funded projects.