Performance audit, Water Infrastructure Finance Authority

              A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Water Infrastructure
Finance Authority
Performance Audit Division
APRIL• 2003
REPORT NO. 03 – 03
Performance Audit
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five
senators and five representatives. Her mission is to provide independent and impartial information and specific
recommendations to improve the operations of state and local government entities. To this end, she provides financial
audits and accounting services to the State and political subdivisions, investigates possible misuse of public monies, and
conducts performance audits of school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Robert Blendu, Chair Representative John Huppenthal, Vice Chair
Senator Gabrielle Giffords Representative Tom Boone
Senator Peter Rios Representative Ken Clark
Senator Thayer Verschoor Representative Ted Downing
Senator Jim Weiers Representative Steve Yarbrough
Senator Ken Bennett (ex-officio) Representative Jake Flake (ex-officio)
Audit Staff
Dale Chapman, Manager and Contact Person
Andrea Leder, Team Member
Jessica Tucker, Team Member
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44 th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553 -0333 • FAX (602) 553 -0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
April 24, 2003
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Greg Swartz, Executive Director
Water Infrastructure Finance Authority of Arizona
Transmitted herewith is a report of the Auditor General, A Performance Audit of the Water
Infrastructure Finance Authority. This report is in response to a May 14, 2002, resolution of the
Joint Legislative Audit Committee. The performance audit was conducted as part of the Sunset
review set forth in A.R.S. §41-2951 et seq. I am also transmitting with this report a copy of the
Report Highlights for this audit to provide a quick summary for your convenience.
As outlined in its response, the Water Infrastructure Finance Authority agrees with the findings
and plans to implement all of the recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on April 25, 2003.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
Services:
The Water Infrastructure Finance Authority (WIFA) finances
drinking water and wastewater infrastructure projects for
communities throughout Arizona. WIFA administers three
main programs:
􀁺􇩃 Clean Water Revolving Fund program—Provides low-interest
rate loans for the planning, engineering, con-structing,
upgrading, and/or equipping of publicly
owned wastewater and water reclamation projects.
For disadvantaged communities designated by WIFA,
it may also provide hardship grants instead of loans.
􀁺􇩄 Drinking Water Revolving Fund program—Provides
low-interest rate loans for the planning, engineering,
constructing, upgrading, and/or equipping of public
and private drinking water system facilities.
􀁺􇩔 Technical Assistance Program—Assists eligible
wastewater and drinking water systems serving popu-lations
of 10,000 or fewer to prepare for project con-struction
through pre-design and design grants.
Mission:
“To maintain and improve water quality in Arizona by provid-ing
financial assistance and technical assistance for basic
water infrastructure.”
Personnel:
A 12-member board of directors governs WIFA:
􀁺􇩓 Seven board members are appointed by the
Governor and represent Native American tribes,
municipalities, counties, sanitary districts, and public
water systems. They serve 5-year staggered terms.
􀁺􇩆 Five board members represent state agencies. The
Director of the Arizona Department of Environmental
PROGRAM FACT SHEET
Water Infrastructure Finance Authority
WIFA funding sources:
$174.2 million (fiscal year 2002 actual)
Office of the Auditor General
$14.3 million for revenue bond payments
$2.9 million for investments (net)
$88.4 million for clean water and drinking water
program loans
$2.7 million for administrative, technical assistance
grants, and other expenses
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$114 million from the sale of revenue bonds
$37.9 million from loan payments and fees
$11.7 million from federal sources
$7.6 million from investment income
$3 million from the State General Fund
$0
$15
$30
$45
$60
$75
$90
$105
$120
WIFA funding uses:
$108.3 million (fiscal year 2002 actual)
Quality serves as the board chairman. The other four state agencies represented on the
board are the Arizona Corporation Commission, Department of Commerce, Department
of Water Resources, and the Office of Treasurer.
As of January 2003, WIFA had 12 staff, including an executive director, controller, and finance
director.
Facilities and Equipment:
WIFA performs its duties in Phoenix at 1110 West Washington Street in the building being lease-purchased
by the State. Its equipment includes typical office equipment such as furniture and
computer equipment. WIFA also owns one vehicle.
Program Goals (Fiscal Year 2003):
1. Award WIFA’s resources in accordance with the needs of Arizona’s citizens.
2. Maintain the fiscal integrity of WIFA’s funds and assure continuous enhancement for
future generations.
3. Facilitate access to and effectively deliver financial and technical assistance.
4. Coordinate with other funding sources, technical resources, and regulatory authorities.
5. Assume leadership role in water infrastructure finance.
6. Efficiently administer WIFA.
7. Facilitate and encourage board-of-director involvement in WIFA.
Adequacy of performance measures:
The Water Infrastructure Finance Authority has established appropriate performance measures.
For example, WIFA has established measures focusing on whether the wastewater and drinking
water systems with the most need receive financial assistance, maintaining the revolving funds
for the future, and facilitating communities’ and systems’ access to financial and technical assis-tance.
State of Arizona
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Water Infrastructure Finance Authority (WIFA) pursuant to a May 14,
2002, resolution of the Joint Legislative Audit Committee. The audit was conducted
as part of the Sunset review set forth in Arizona Revised Statutes (A.R.S.) §41-2951
et seq.
WIFA finances projects related to building or improving drinking water, wastewater, or
other water quality facilities. Through two revolving fund programs, WIFA provides
low-interest rate loans to communities throughout Arizona. The Clean Water
Revolving Fund program assists publicly owned wastewater systems, while the
Drinking Water Revolving Fund program assists public and private drinking water
systems. WIFA also provides grants from these two funds through the Technical
Assistance Program. These grants assist eligible wastewater and drinking water sys-tems
serving populations of 10,000 or fewer with the pre-design and design of proj-ects.
Funding for the two revolving fund programs comes from a combination of federal
grants, revenue bond proceeds, loan repayments, and some State General Fund
monies. For the 2003 funding cycle, WIFA has received 52 drinking water applications
requesting over $100 million in WIFA assistance and 51 clean water applications
requesting nearly $149 million in WIFA assistance as of December 18, 2002.1 WIFA
has also received 38 applications for its Technical Assistance Program. For the 2002
funding cycle, WIFA approved loans totaling more than $114 million.
Processes for reviewing and scoring applications need
improvement (see pages 11 through 16)
WIFA has developed processes for prioritizing water infrastructure project applica-tions,
but could benefit from additional review steps in its processes to help ensure
all eligible projects are accurately scored and the project interest rates appropriately
determined. WIFA’s processes are consistent with federal requirements and if cor-rectly
applied, can help ensure that projects are consistently and properly evaluated.
page i
1 The 2003 Drinking Water Revolving Fund and Clean Water Revolving Fund programs’ funding cycle is calendar year
2003. While WIFA has an application deadline of October 1 prior to the funding cycle year, it will accept and review appli-cations
throughout the funding cycle.
Office of the Auditor General
SUMMARY
Auditors reviewed WIFA’s scoring data sheets for the 2002 and 2003 funding cycles
and did not note any errors in the 2002 funding cycles scoring sheets, but found
errors and omissions in the 2003 funding cycle scoring data sheets that resulted in
more than 90 percent of the projects initially being inaccurately scored. Inaccurate
scores have two potential effects. They can result in projects being placed too high
or too low on the priority list and can also result in projects being charged an interest
rate that is higher or lower than it should have been. Although WIFA corrected these
errors and omissions after auditors pointed them out and before the Board approved
the final priority list and funded any projects, the presence of so many errors signals
a need to take steps so that similar errors are minimized in the future. Therefore, WIFA
should develop additional procedures to help staff make accurate calculations and
institute more reviews of completed work.
Other pertinent information (see pages 17 through 24)
In response to legislative staff inquiries, auditors developed information on two
national issues affecting Arizona’s water systems—the federal formula for allocating
monies from the Clean Water State Revolving Fund and the new federal arsenic stan-dard.
This report also contains information on concerns raised by WIFA’s external
auditor regarding WIFA’s accounting and financial reporting management controls.
􀁺􇩆 Federal Clean Water Allocation Formula—The federal Clean Water State
Revolving Fund, which provides monies to local water systems and communi-ties
for water and wastewater infrastructure projects, is funded through annual
grants provided by the federal government. The federal Clean Water Act deter-mines
individual state funding levels. However, the current formula does not
accurately reflect some states’ needs, including Arizona’s, and relative to other
states of similar size and need, Arizona is receiving less money. As a result, WIFA
has relied more heavily on other sources of funding, such as bonds, to meet
Arizona’s clean water infrastructure needs. If the formula were based on states’
current needs, similar to the federal drinking water allocation formula, Arizona
would receive a significant increase in its clean water allocation. According to
WIFA’s 2002 Wastewater, Water Reclamation and Storm Water Infrastructure
Needs Survey, Arizona’s federal clean water allocation could increase from
approximately $9 million a year to $45 million annually. During the 107th
Congressional Session (2002), congressional delegates introduced legislation
to allocate clean water appropriations based on states’ current needs, but the
legislation was defeated. These efforts will continue.
􀁺􇨠 New Federal Arsenic Standard—In 2001, the U.S. Environmental Protection
Agency established a new standard for arsenic in drinking water to reduce the
health risks associated with arsenic. According to the Arizona Department of
Environmental Quality (ADEQ), this new standard will potentially affect hundreds
page ii
State of Arizona
of water systems in Arizona that are not in compliance, and bringing them into
compliance will cost an estimated $565 million to $987 million. Compliance will
be particularly burdensome for small water systems (those serving fewer than
10,000 people), because these systems may be unable to increase water rates
sufficiently to cover compliance costs. According to the ADEQ, 287 of the 320
affected water systems in the State are small water systems, and it will cost
these 287 systems an estimated total of $142 million to comply. As a result,
ADEQ has developed an Arsenic Master Plan to help the affected small water
systems identify treatment options and cost estimates associated with compli-ance.
ADEQ and WIFA plan to coordinate their efforts to help ensure that
Arizona’s drinking water systems comply with the new arsenic standard and are
provided with adequate funding options.
􀁺􇩗 WIFA’s Financial Reporting and Internal Controls—During the fiscal year 2001
and 2002 financial audits, WIFA’s external auditors identified opportunities for
WIFA to strengthen its internal controls over its accounting and financial report-ing
systems. Additionally, WIFA was unable to meet its statutory and Department
of Administration deadlines for submitting its final fiscal year 2002 audited finan-cial
statements. While WIFA’s executive director has acknowledged the need to
improve WIFA’s internal controls, and WIFA has hired additional staff and is in the
process of implementing a new automated accounting system, WIFA’s external
auditors made additional recommendations for improvement.
Sunset Factors (see pages 25 through 31)
As part of the Sunset review process, this audit makes the following additional rec-ommendations:
􀁺􇨠 WIFA should renew its Clean Water Revolving Fund program agreement with the
U.S. Environmental Protection Agency.
􀁺􇩗 WIFA should ensure that its board meeting minutes provide a detailed descrip-tion
of any disclosed conflict of interest and establish a special file for retaining
board meeting minutes that disclose conflicts of interest.
􀁺􇩗 WIFA should file the required statement with the Secretary of State indicating
where it will post public meeting notices.
page iii
Office of the Auditor General
page iv
State of Arizona
pagev
Office of the Auditor General
TABLE OF CONTENTS
concluded
1
11
11
14
16
17
17
20
23
25
3
12
6
Introduction & Background
Finding 1: Processes for reviewing and scoring appli-cations
need improvement
Processes are consistent with federal requirements
WIFA needs to ensure scoring accuracy
Recommendations
Other Pertinent Information
Federal clean water allocation formula
New arsenic standard
Concerns about WIFA internal controls
Sunset Factors
Figures:
1 Number of Project Applications Received and Approved, and
Funding Provided To Approved Projects
Funding Cycle 2002
2 Project Application and Loan Process
As of February 2003
Table:
1 Schedule of Cash Flows for the Arizona Clean Water
and Arizona Drinking Water Revolving Funds
Year Ended June 30, 2002 (Unaudited)
page vi
State of Arizona
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Water Infrastructure Finance Authority (WIFA) pursuant to a May 14,
2002, resolution of the Joint Legislative Audit Committee. The audit was conducted
as part of the Sunset review set forth in Arizona Revised Statutes (A.R.S.) §41-2951
et seq.
WIFA history and purpose
The Legislature established WIFA in 1997 as a separate legal entity of the State,
authorized to provide financial assistance for projects related to the construction or
improvement of drinking water, wastewater, or other water-quality facility projects.
Prior to WIFA, the Wastewater Management Authority provided financial assistance
for wastewater infrastructure projects to Arizona’s communities. However, in
response to federal legislation that created the Drinking Water State Revolving Fund
program to assist states in their efforts to provide safe drinking water, the Legislature
eliminated the Wastewater Management Authority and created WIFA.
In addition to being established as a separate legal entity of the State, WIFA is statu-torily
authorized to have a judicially noticed seal; to sue and be sued; to acquire,
hold, and dispose of property; and to hire attorneys and consultants. Additionally,
WIFA has statutory authority to issue bonds, which according to statute, are its own
obligations and not those of the State.
Federal laws require each state to designate an administrator for the Clean Water
State Revolving Fund and Drinking Water State Revolving Fund programs, but do not
specify a particular type of agency or entity. While some states have established infra-structure
financing authorities like Arizona has, generally, states’ environmental and
natural resources agencies administer the programs. Additionally, in some other
states, water resources boards or health departments serve as the administrator.
page1
WIFA finances waste-water
and drinking water
infrastructure.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
WIFA programs
WIFA administers three main programs:
􀁺􇩃 Clean Water Revolving Fund program—Congress created the Clean Water
State Revolving Fund in 1987 as part of the federal Clean Water Act. This pro-gram
provides financial assistance to publicly owned wastewater and water
reclamation systems through low-interest loans for projects such as expansion
of a wastewater treatment plant’s capacity and septic system upgrades. Publicly
owned wastewater and water reclamation systems can apply for loans to plan,
engineer, construct, rehabilitate, upgrade, and/or equip wastewater treatment or
water reclamation facilities. For example, in 2002, WIFA provided a $6.5 million
loan to the Town of Florence for a new wastewater treatment plant. For disad-vantaged
communities designated by WIFA, it may also provide hardship grants
instead of loans.
􀁺􇩄 Drinking Water Revolving Fund program—This program is newer than the Clean
Water Revolving Fund program, having been created by Congress in 1996 as
part of the federal Safe Drinking Water Act. It provides low-interest loans for proj-ects
such as water storage facility improvement and rehabilitation of wells.
Publicly and privately held drinking water systems can apply for loans to plan,
engineer, construct, rehabilitate, upgrade, and/or equip drinking water facilities.
For example, in 2002, WIFA provided a $10 million loan to the City of Yuma for
four projects, including the design and construction of additional water trans-mission-
line capacity. Projects may also use fund monies to prevent pollutants
from reaching sources of drinking water.
􀁺􇩔 Technical Assistance Program—The Technical Assistance Program assists eli-gible
wastewater and drinking water systems to prepare for project construction.
The program provides pre-design and design grants to eligible systems serving
populations of 10,000 or fewer people and offers loans to all eligible systems.
This program also funds policy projects, such as residential rate surveys and the
State’s Arsenic Master Plan, that benefit drinking water and wastewater systems
state-wide. Funding for this program comes from the two revolving fund pro-grams.
Project activity
Since 2001, WIFA has received over 100 applications annually requesting financial
assistance for water infrastructure projects. WIFA reviews and prioritizes each appli-cation
received based on the problem addressed by the project, project benefits,
and the community’s economic and financial conditions. For the 2003 funding cycle,
page2
State of Arizona
Since 2001, WIFA has
received over 100 assis-tance
applications each
year.
WIFA has received 52 drinking water applications requesting over $100 million and
51 clean water applications requesting nearly $149 million as of December 18, 2002.1
WIFA has also received 38 applications for its Technical Assistance Program.
The number of projects to be funded
from the priority list depends on the
extent of available funding and the
readiness of the project to proceed.
For funded projects, WIFA disburses
the loan monies throughout con-struction
as the communities and
water systems incur project costs. As
illustrated in Figure 1, WIFA approved
loans totaling more than $114 million
for 28 projects during the 2002 fund-ing
cycle. Further, it provided just
over $426,000 in technical assis-tance
grants for 23 projects. For
those projects that do not receive
loans because the projects are not
ready to proceed, the communities
and water systems can reapply for
assistance in the next funding cycle.
Additionally, communities and water
systems can seek funding from other
sources, including the U.S.
Department of Agriculture—Rural
Utilities Service, and the North
American Free Trade Agreement’s
(NAFTA) Border Environment
Cooperation Commission.
Since 1989, WIFA and its predecessor, the Wastewater Management Authority, have
either loaned or granted hundreds of millions of dollars to communities and water
systems for projects. According to the U.S. Environmental Protection Agency (EPA),
as of June 30, 2002, WIFA and its predecessor had issued 131 loans financing near-ly
$479 million in water infrastructure. Nearly three-quarters of these loans and
approximately 32 percent of the funding ($154.4 million) assisted small communities
and water systems.2 Within EPA’s Region 9, Arizona leads in the number of drinking
water loans issued and the amount of assistance provided, while for clean water, it
falls second to California.1 Further, according to the EPA, compared to other states,
page3
Nearly $479 million in
water infrastructure proj-ects
have been
financed.
1 The 2003 calendar year is the Drinking Water Revolving Fund and Clean Water Revolving Fund programs’ funding cycle.
While WIFA has an application deadline of October 1 prior to the funding cycle year, it will accept and review applications
throughout the funding cycle.
2 Small communities and water systems are those serving populations of 10,000 or fewer for drinking water assistance and
9,999 or fewer for clean water assistance.
Office of the Auditor General
66
13
72
15
48
23
0
10
20
30
40
50
60
70
80
Clean Water Revolving
Fund Program
Drinking Water Revolving
Fund Program
Technical Assistance
Program
Number of Project Applications Received Number of Projects Approved
Figure 1 Number of Project Applications Received and Approved,
and Funding Provided To Approved Projects
Funding Cycle 20021
Funding
Approved
$94,592,853
Funding
Approved
$19,709,375
Funding
Approved
$426,121
Source: Auditor General staff analysis of WIFA’s Funding Cycle 2002 Drinking Water Revolving
Fund Priority List revised in February 2002, WIFA’s Funding Cycle 2002 Clean Water
Revolving Fund Priority List revised in February 2002, the Technical Assistance Intended
Use Plan Funding Cycle 2002, and other data provided by the Water Infrastructure Finance
Authority.
1 The 2002 funding cycle for the Clean Water Revolving Fund and the Drinking
Water Revolving Fund programs is the calendar year. The 2002 funding cycle
for the Technical Assistance Program began on July 1, 2001, and ended on
June 30, 2002.
Number of Projects Funded
Arizona maximizes the amount of financial assistance it provides for drinking water
projects.
Organization and staffing
WIFA is governed by a 12-member board of directors. Seven of the board members
are appointed by the Governor and represent Native American tribes, municipalities,
counties, sanitary districts, and public water systems. They serve 5-year staggered
terms. The other five board members represent state agencies. The Director of the
Arizona Department of Environmental Quality (ADEQ) serves as the board chairman.
The other four state agencies with representation on WIFA’s Board are the Arizona
Corporation Commission, Department of Commerce, Department of Water
Resources, and Office of Treasurer. WIFA has 12 staff, including an executive director,
controller, and finance director. The staff review community and water system appli-cations
for financial assistance, finalize project loans, and distribute loan monies.
WIFA budget
Funding for WIFA’s two revolving fund programs come from a variety of sources,
including federal grants, state matching monies, revenue bonds, and borrower loan
payments and fees.
􀁺􇩆 Federal grants—The EPA provides WIFA with yearly federal grants for its Clean
Water Revolving Fund and Drinking Water Revolving Fund programs, but not in
lump-sum amounts. Instead, WIFA submits funding requests as it pays for water
infrastructure project costs. Any portion of the yearly allocated grant amount that
is not requested by WIFA is held by the EPA. According to WIFA management,
under WIFA’s predecessor, Arizona did not draw down its full clean water allo-cation
annually due to limited loan activity. This resulted in a large balance of
federal grant monies remaining with the EPA. Between 1991 and 1996, Arizona
accumulated a balance with the EPA of nearly $28 million in clean water fund
monies. Since 1996, WIFA has taken steps to reduce this balance. For example,
in 2001, WIFA was allocated approximately $9 million in federal grants for the
Clean Water Revolving Fund program, but received over $18 million. According
to the EPA, since the inception of the two fund programs, Arizona has been allo-cated
more than $180 million in federal grants for these two programs.
􀁺􇩓 State matching of federal grants—Arizona must provide state funding at a level
of at least 20 percent of the federal grants. WIFA may generate this matching
amount through State General Fund appropriations, revenue bond proceeds,
fees assessed by WIFA on its loans, or a combination of the three. As illustrated
page4
Federal grants help fund
infrastructure projects.
1 EPA Region 9 includes Arizona, California, Hawaii, and Nevada. According to the EPA, WIFA’s Drinking Water Revolving
Fund program closed 74 loans totaling $158.9 million between July 1, 1996, and June 30, 2002.
State of Arizona
in Table 1 (see page 6), WIFA received approximately $3 million from the State
General Fund, which was used toward its state match in fiscal year 2002. Prior
to fiscal year 1998, WIFA funded the state match entirely through revenue bond
proceeds and loan fees.
􀁺􇨠 Revenue bonds for project financial assistance—In addition to using bond pro-ceeds
for state matching, WIFA issues revenue bonds to fund water infrastruc-ture
projects that have received loan approval from WIFA’s board of directors.
As illustrated in Table 1 (see page 6), WIFA issued $110 million in bonds in fis-cal
year 2002 and had an outstanding bond debt of approximately $241.9 mil-lion
as of June 30, 2002. As part of its bond issuance requirements, WIFA must
maintain a reserve for the bonds it issues. The reserves are held in guaranteed
investment contracts administered by WIFA’s trustee, US Bank. As of September
2002, WIFA had approximately $24 million invested in these con-tracts
for bond debt service reserves. The interest generated on
the guaranteed investment contracts is either used to pay bond
holders or reverts back to the revolving fund programs where it
can be used for additional loans.
􀁺􇨠 Borrower loan payments and fees—Loan principal and interest
payments made by communities are returned to the revolving fund
programs and these monies generally become available for new
loans or are used to retire bond debt. As illustrated in Table 1 (see page 6), in
fiscal year 2002, WIFA received over $35.6 million in loan payments, including
approximately $8.4 million in interest. A majority of WIFA’s borrowers also pay
loan fees. WIFA has separate loan fee rates for government and nongovernment
entities, which typically range from 1.5 percent to 3 percent of the loan amount.
In fiscal year 2002, WIFA generated over $1.9 million in loan fees and had over
$8 million in unspent loan fee monies as of October 2002. WIFA may use these
monies for any purpose, including operations or funding the state match.
The monies that WIFA spends may be categorized into four areas—loans and grants,
payments to bond holders, operations, and ADEQ water quality program adminis-tration.
Loans and grants reflect the financial assistance WIFA provides to wastewater
and drinking water systems for infrastructure improvements. As shown in Table 1 (see
page 6), in fiscal year 2002, WIFA disbursed $88.4 million for project loans and had
approximately $277.4 million in outstanding loans receivable as of June 30, 2002. For
those projects financed through revenue bonds, WIFA makes payments to the bond
holders. For fiscal year 2002, WIFA’s administrative expenses were approximately $1
million. Federal law allows states to use up to 4 percent of their federal grant alloca-tion
to administer the revolving fund programs. States can retain the unused portion
of the 4 percent to use for administrative expenses in future years or for program
loans. WIFA funded its administrative expenses through this 4 percent mechanism.
page5
WIFA had over $241 mil-lion
in outstanding bond
debt as of June 30,
2002.
Office of the Auditor General
Guaranteed Investment Contracts
are signed with financial institu-tions
guaranteeing certain interest
rates. Anything above that rate
becomes profit for the financial
institution.
WIFA has over $277 mil-lion
in outstanding loans
receivable.
page6
State of Arizona
Clean Water Drinking Water Total
Cash flows from operating activities:
Federal grants received $ 7,124,564 $ 2,973,717 $ 10,098,281
State General Fund appropriations received 1,443,200 1,551,900 2,995,100
Program loans: 2
Principal payments collected 22,584,674 4,630,399 27,215,073
Interest payments collected 6,688,305 1,743,020 8,431,325
Loan fees collected 3 898,056 1,024,387 1,922,443
Loan reserves collected 8,906 280,772 289,678
Loans made (59,666,912) (28,757,501) (88,424,413)
Technical assistance grants and other expenses paid (143,413) (179,824) (323,237)
Financial assistance expenses paid (677,847) (677,847)
Federal administrative grants received 269,831 1,358,803 1,628,634
Administrative expenses paid for ADEQ set-aside 4 (625,486) (625,486)
Other administrative expenses paid (498,630) (547,227) (1,045,857)
Cash transfers (to) or from other funds (14,050,196) 14,050,196
Net cash used for operating activities (36,019,462) (2,496,844) (38,516,306)
Cash flows from noncapital financing activities: 5
Proceeds from sale of revenue bonds 58,158,154 55,877,441 114,035,595
Principal paid on revenue bond maturities (5,270,270) (464,730) (5,735,000)
Interest paid on revenue bonds (7,368,609) (1,188,384) (8,556,993)
Net cash provided by noncapital financing activities 45,519,275 54,224,327 99,743,602
Cash flows from investing activities:
Interest received on investments 5,461,384 2,142,716 7,604,100
Net change in investments purchased and matured or sold 681,426 (3,567,565) (2,886,139)
Net cash provided by (used for) investing activities 6,142,810 (1,424,849) 4,717,961
Net increase in cash and cash equivalents 15,642,623 50,302,634 65,945,257
Cash and cash equivalents, beginning of year 45,359,956 3,415,896 48,775,852
Cash and cash equivalents, end of year $61,002,579 $53,718,530 $114,721,109
1 The Authority also maintains a Hardship Grant Fund; however, this Fund is not presented because it was insignificant in
comparison to the Clean Water and Drinking Water Revolving Funds.
2 Amounts relate to loans made to local governments and others in Arizona to finance various projects. As of June 30, 2002, the
Authority’s outstanding loans receivable was $277.4 million.
3 Amounts are annual administrative fees charged to loan recipients that are available to defray the Authority’s administrative
expenses.
4 Amounts are monies passed through to the Arizona Department of Environmental Quality (ADEQ) for its role in administering
three drinking water programs.
5 Amounts are the proceeds from the $110 million revenue bonds issued in October 2001 and the principal and interest paid on
the Authority’s revenue bonds. As of June 2002, the Authority’s bonds payable was $241.9 million.
Source: Auditor General staff analysis of the Water Infrastructure Finance Authority’s audited Financial
Statements for the year ended June 30, 2002. The statements were audited by an independent certified
public accountant.
Table 1 Schedule of Cash Flows for the Arizona Clean Water
and Drinking Water Revolving Funds1
Year Ended June 30, 2002
(Unaudited)
Finally, as illustrated in Table 1 (see page 6), during fiscal year 2002, WIFA passed-through
approximately $625,000 in federal monies to ADEQ to administer three drink-ing
water programs. Each state can designate up to 25 percent of its federal Drinking
Water State Revolving Fund grant to establish and implement programs that place
an emphasis on preventing water contamination and encouraging better system
operations.1 ADEQ receives monies through WIFA from the federal Drinking Water
State Revolving Fund to administer three programs—Wellhead
Protection, Capacity Development, and Public Water System
Supervision (PWSS). For the PWSS program, the Act requires
Arizona to provide a dollar-for-dollar match for expenditures
made under this program. This match is provided by ADEQ
through State General Fund monies.
Audit scope and methodology
This audit focused on WIFA’s processes for prioritizing and
funding water infrastructure projects, the federal clean water
allocation formula, the new federal arsenic requirements, and
WIFA’s accounting and financial reporting management con-trols.
This performance audit and Sunset review includes one
finding and associated recommendations:
􀁺􇩗 While WIFA has developed specific processes for approv-ing
projects, WIFA needs additional review steps in its
processes to help ensure that all eligible projects are accu-rately
scored and prioritized, and that the project interest
rates are appropriately determined.
In addition, this report contains other pertinent information in
three areas:
􀁺􇨠 The federal formula used to allocate Clean Water State
Revolving Fund program monies and how the formula affects Arizona’s funding.
􀁺􇨠 The new federal arsenic standard for drinking water and its impact on Arizona
drinking water systems.
􀁺􇩉 Issues regarding WIFA’s financial reporting and accounting internal controls.
Finally, within the Sunset Factors (see pages 25 through 31), the report recommends
that WIFA should renew its Clean Water Revolving Fund agreement with the EPA,
properly disclose board member conflicts of interest, retain these disclosures in a
page7
Office of the Auditor General
1 The Safe Drinking Water Act allows Arizona to spend up to 15 percent collectively for the Wellhead Protection and Capacity
Development programs, and up to 10 percent of its federal grant for the Public Water System Supervision program.
ADEQ Drinking Water Programs
􀁺􇩗 Wellhead Protection—Wellhead protection
is a voluntary program designed to help
water systems enact protection programs
to ensure their water systems remain con-taminant
free.
􀁺􇩃 Capacity Development—When the Safe
Drinking Water Act was reauthorized in
1996, Congress required all new public
water systems to demonstrate technical,
managerial, and financial capability before
they could be allowed to operate. ADEQ
assesses new systems’ compliance with
these requirements and works with new
and existing systems to meet them.
􀁺􇩐 Public Water System Supervision
(PWSS)—PWSS includes several pro-grams
for implementation and enforcement
of the Safe Drinking Water Act. Examples
include operator certification programs and
monitoring water systems’ compliance
with drinking water standards.
special file, and file the required statement with the Secretary of State indicating
where public meeting notices will be posted.
Auditors used a number of methods to study the issues addressed in this report.
They attended three WIFA board meetings; interviewed the WIFA board chairperson,
WIFA staff, and an official with the EPA’s Region 9 office; and reviewed statutes, rules,
policies and procedures, and WIFA board meeting minutes from January 2000
through October 2002. To perform more specific audit steps, they used the following
methods:
􀁺􇩔 To evaluate WIFA’s processes for reviewing, scoring, prioritizing, and funding
water infrastructure projects, auditors reviewed the federal Clean Water and Safe
Drinking Water acts and relevant portions of the Code of Federal Regulations.
Auditors also reviewed funding cycle 2002 and 2003 scoring data sheets, which
included 143 and 103 projects, respectively; observed WIFA staff score three
clean water and three drinking water priority list applications for the 2003 fund-ing
cycle; and reviewed the scoring of the 103 projects’ interest rate subsidies
for funding cycle 2003. In addition, auditors reviewed 2002 funding cycle loan
information for the Clean Water Revolving Fund and Drinking Water Revolving
Fund programs. Finally, auditors attended the public hearing held in November
2002 for the Clean Water Revolving Fund and Drinking Water Revolving Fund
programs’ intended use plans, and observed WIFA staff conduct an on-site visit
for a project financed by WIFA.
􀁺􇩔 To develop information on the federal clean water allocation formula and its
effect on Arizona’s funding, auditors reviewed sections of the Clean Water Act,
fact sheets, and reports issued by the EPA, including the most recent needs sur-veys
for the Clean Water State Revolving Fund and Drinking Water State
Revolving Fund programs—the 1996 Clean Water Needs Survey and the 2001
Drinking Water Needs Survey, as well as the 2002 Clean Water and Drinking
Water Infrastructure Gap Analysis. Auditors also reviewed the 2002 Wastewater,
Water Reclamation and Storm Water Infrastructure Needs Survey Clean Water
Needs Survey prepared by WIFA staff. In addition, auditors reviewed two bills
and a proposed amendment considered by the 107th Congress to revise the
federal clean water allocation formula, interviewed an environmental protection
specialist from EPA’s Washington, D.C. office, and interviewed a staff member
from the office of one Arizona senator.
􀁺􇩔 To assess the impact of the federal arsenic standard on Arizona’s drinking water
systems, auditors reviewed the federal arsenic rule published in the January 22,
2001, edition of the Federal Register, interviewed a water quality official from the
Arizona Department of Environmental Quality (ADEQ), and reviewed ADEQ’s
draft Arsenic Master Plan, as well as arsenic fact sheets issued by the EPA.
Auditors also reviewed summaries of several health studies on arsenic in drink-page8
State of Arizona
page9
Office of the Auditor General
ing water conducted by the National Academy of Sciences (NAS), including
Arsenic in Drinking Water (1999) and Arsenic in Drinking Water: 2001 Update.
􀁺􇨠 To develop information on WIFA’s financial reporting and accounting manage-ment
controls, auditors reviewed the annual financial statements prepared by
WIFA’s external auditors for fiscal years 2001 and 2002, and the management
letters from the fiscal year 2001 and 2002 financial audits, and interviewed a
Department of Administration official.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Water Infrastructure
Finance Authority board members, executive director, and staff for their cooperation
and assistance throughout the audit.
page10
State of Arizona
Processes for reviewing and scoring applications
need improvement
Although WIFA has developed processes for prioritizing, funding, and overseeing
water infrastructure projects, it could benefit from additional review steps in its
processes to help ensure that all projects are accurately scored and the project inter-est
rates appropriately determined. WIFA’s processes are consistent with federal
requirements and, if correctly applied, can help ensure that projects are evaluated
consistently and properly. However, when auditors examined WIFA’s evaluation of
2003 funding cycle applications using these processes, they found that most proj-ects
initially received incorrect scores. Auditors also reviewed the 2002 funding cycle
scores and did not find any problems. While WIFA corrected these 2003 funding
cycle scores after auditors brought them to its attention and before funding any proj-ects,
these mistakes could have affected both the priority order established for fund-ing
the projects and the interest rates that applicants would pay for the loans. By
adding steps to its review of project applications, WIFA can address these problems.
Processes are consistent with federal requirements
WIFA has procedures in place for prioritizing and funding water infrastructure proj-ects,
and for reviewing projects that are ready to be funded to ensure that required
reserves are present and that adequate technical expertise is in place. These
processes are consistent with federal requirements.
Procedures for prioritizing projects—Federal laws require states to annual-ly
develop and submit “intended use plans” that detail how the states plan to use
their available funding to finance drinking water and wastewater infrastructure proj-ects
through their Drinking Water State Revolving Fund and Clean Water State
Revolving Fund programs. As illustrated in Figure 2 (see page 12), WIFA employs
page11
Office of the Auditor General
FINDING 1
page12
State of Arizona
Figure 2 Project Application and Loan Process
As of February 2003
Wastewater and drinking water operators
submit applications for Clean Water
Revolving Fund and Drinking Water
Revolving Fund program financial assis-tance.
1
Staff reviews and scores applications based on
the water infrastructure problem addressed, proj-ect
benefits, and community’s economic condi-tions.
Staff develops draft plans, which contain priori-tized
lists of projects and shows how WIFA
intends to use its available funding.
WIFA holds public hearing on draft plans.
Board adopts final plans, including project priority
lists, project interest rate subsidies, and lists of
fundable projects.
Staff assesses each operator’s ability to repay
loan, each operator’s managerial and technical
capabilities, and whether the project is ready to
proceed.
Staff develops summary report that includes proj-ect
loan recommendations for the Board.
Board approves loans with individual wastewater
and drinking water operators.
Staff finalizes loan paperwork.
Staff reviews status of projects and distributes
loan monies based on project’s progress.
Wastewater and drinking water operators
on fundable lists submit second applica-tions,
which describe operators’ financial,
legal, and technical capabilities.
1 Wastewater and drinking water operators include communities, sanitary districts, private drinking water companies, and
Native American tribes.
Source: Auditor General staff analysis and summary of Water Infrastructure Finance Authority (WIFA) administrative rules, policies, and interviews with
WIFA staff.
several steps in its processes to review project applications and approve loans.
WIFA’s information in its intended use plans and its other steps to deal with these
requirements include the following:
􀁺􇩐 Project priority list—Federal regulations require states to establish processes for
prioritizing all project applications received from wastewater and drinking water
systems. The prioritized list of projects must then be included in the intended
use plan. WIFA has established in administrative rule a priority process that
encompasses the federal requirements, and awards points based on the type
of existing water infrastructure problem, project benefits, and the community’s
economic and financial conditions. Once it scores all project applications, WIFA
generates a list that ranks all applicants in priority order starting with the project
that received the most points overall. For the 2003 funding cycle, WIFA received
and prioritized 103 drinking water and clean water applications requesting over
$249 million in WIFA assistance.
􀁺􇩌 List of fundable projects—Federal regulations require states to identify which
projects they anticipate funding during the year. WIFA develops a list of fundable
projects that reflects a subset of the priority list and is based on WIFA estimates
of available funding. WIFA also takes steps to determine if the projects on its list
are ready to proceed. In deciding this, WIFA determines whether the applicant
has received debt authorization, completed the project design, received plan
and specification approvals generally from the Arizona Department of
Environmental Quality, and solicited project bids. For the 2003 cycle, WIFA antic-ipates
funding 29 drinking water and clean water projects totaling over $92 mil-lion.
􀁺􇨠 Interest rate subsidies—Federal laws require
states to provide loans to communities at or below
market interest rates. WIFA complies with this
requirement by setting the interest rate on every
project in its intended use plan at 70 to 100 per-cent
of the tax-exempt rate for governmental enti-ties
or, for nongovernmental entities, at the prime
rate. The extent of the interest rate subsidy is
based on a project’s position on the priority list
and the community’s financial and economic con-ditions,
which are scored as part of the prioritiza-tion
process. Although the interest rate subsidy is
included in the intended use plan, the actual inter-est
rate is not determined until just before to the
loan is finalized.
􀁺􇨠 Public comment—Federal regulations require states to provide the public with
the opportunity to comment on the intended use plans during their develop-page13
Office of the Auditor General
WIFA provides loans at
or below market interest
rates.
2003 project applica-tions
have requested
over $249 million in
assistance.
Interest Rate Calculation Example
Before WIFA finalizes a loan, it determines the current
interest rate and then calculates the project’s interest
rate based on the project’s position on the priority list
and the community’s financial and economic condi-tion.
For example, on January 15, 2003, the tax-exempt
rate was 4.77 percent. Instead of paying 4.77
percent interest on its loan, a public entity with the
maximum interest rate subsidy would pay 70 percent
of the rate, or approximately 3.3 percent.
page14
State of Arizona
ment. WIFA meets this requirement by holding a public hearing on the plans
before WIFA’s Board adopts them.
Additional project reviews required prior to funding—Federal regula-tions
require states to ensure that systems have a dedicated revenue source to repay
loans. Further, the Safe Drinking Water Act also requires that systems have the tech-nical,
managerial, and financial capability to reliably deliver safe drinking water. To
comply, WIFA has established a process to review the technical, managerial, finan-cial,
and legal capacities of all projects that are ready to be funded. During this
review, WIFA considers, for example, the revenue sources the system will use to
repay the loan and the management and technical expertise of system staff. This
review results in recommendations to WIFA’s Board about whether, or under what
conditions, WIFA should enter into a loan agreement with the system. For example, if
a community had not yet hired a project manager to oversee construction, the Board
would condition the loan approval on the community hiring a project manager. If a
community or water system is unable to meet the conditions required by WIFA, it
would not receive funding, but can reapply in the next funding cycle.
WIFA also uses document reviews and on-site visits to monitor project progress dur-ing
construction. WIFA requires all borrowers to submit project status reports with
their requests for loan funds. A borrower does not receive the loan proceeds from
WIFA in one lump sum at the beginning of the project, but rather over the course of
the project’s construction as construction milestones are met and costs are incurred.
In addition to document reviews, WIFA staff with an engineering background typical-ly
will conduct at least two site visits to assess project construction against project
expenditures.
WIFA needs to ensure scoring accuracy
While these processes are consistent with federal requirements, WIFA needs to do
more to ensure the accuracy with which they are carried out. Auditors reviewed
WIFA’s scoring data sheets for both the 2002 and 2003 funding cycles and while no
errors were identified in the 2002 funding cycle scoring data sheets, auditors found
several errors and omissions in the 2003 funding cycle scoring data sheets that
resulted in more than 90 percent of the projects initially being inaccurately scored.
Because such errors could affect WIFA’s lending capacity and the communities that
receive WIFA loans, WIFA should incorporate management reviews into its process-es
and develop policies and procedures to improve the reliability of its scoring data
sheets.
WIFA initially inaccurately scored majority of projects—Auditors’ review of
WIFA’s 2003 funding cycle scoring data sheets for the two revolving fund programs
found errors in 96 of the 103 (93 percent) projects’ initial scores. While similar errors
were not identified by auditors in their review of the 2002 funding cycle scoring data
sheets, the 2003 errors resulted from inaccurate calculations, skipped steps, and
missing data. For example, due to a missing formula on the scoring data sheets,
Clean Water Revolving Fund program applicants did not receive any points for proj-ect
cost effectiveness, which is scored based on the project’s costs per household
connected to the system. According to Administrative Rule R18-15-205(A)(3)(d),
WIFA should award up to 20 points for a project’s cost effectiveness out of the 100
total points available for a community’s financial and economic conditions.
Additionally, due to an inaccurate calculation, applicants received more points than
were possible for the communities’ financial and economic conditions. As a result,
applicants’ scores were inflated.
WIFA corrected these errors and omissions after auditors brought them to WIFA’s
attention and before the Board approved the final priority list and funded any proj-ects.
However, the presence of so many errors on the data scoring sheets is a sig-nal
that steps are needed to minimize similar errors in the future. Such errors can
have the following consequences:
􀁺􇩁 Accuracy of interest rates affected—Because a project’s score helps determine
a project’s interest rate subsidy, inaccurate scoring initially resulted in interest
rates that were set too low in some cases, and too high in others. Auditors deter-mined
that if the mistakes had not been caught, the overstated interest rate sub-sidies
for nine projects could have decreased WIFA’s available loan monies in
the future by more than $2.2 million. Further, the understated interest rate subsi-dies
could have cost the 12 affected communities more than $835,000 in addi-tional
interest.1 The following examples illustrate the potential effect of inaccurate
interest rate subsidies.
􀂍􈵔 The interest rate subsidy miscalculation on a $20 million water treatment
plant project for a Maricopa County community would have resulted in
WIFA over-subsidizing the project. Over the course of the loan, WIFA would
have failed to collect more than $1.2 million in interest that the community
should have paid. Since it would not have been collected, this money would
be unavailable to fund other communities’ projects in the future.
􀂍􈵆 For a community in Cochise County, the interest rate subsidy miscalcula-tion
for its $11 million sewer rehabilitation loan would have resulted in WIFA
under-subsidizing the project. Over the course of the loan, the community
would have overpaid nearly $341,000 in interest.
􀁺􇩐 Priority order may be incorrect—The scoring errors also caused some projects
to be incorrectly prioritized on the draft priority list. Although some projects were
mis-prioritized by one or two positions, one project improved its position on the
priority list by 11 positions after the errors were corrected. Currently, scoring
inaccuracies are not a significant concern because WIFA is able to fund projects
page15
Office of the Auditor General
Scoring errors can affect
project interest rates
and ranking.
1 The projects included in these dollar estimates are those that WIFA anticipates funding during 2003 as reported in the
2003 Drinking Water Revolving Fund and Clean Water Revolving Fund programs’ intended use plans.
page16
State of Arizona
that are ready to proceed, regardless of their position on the final priority list.
However, future potential increased demand on these funds, resulting from such
things as the need for state drinking water systems to comply with the new
arsenic standard (see Other Pertinent Information, pages 20 through 22), could
result in WIFA relying more on a project’s priority scoring information to allocate
project funding.
WIFA needs to improve project scoring reliability—Two main steps are
needed to improve the reliability of scores. First, where needed, WIFA needs to adopt
procedures that staff can use to help ensure the accuracy of information. For exam-ple,
to improve the accuracy of scoring data sheet information, WIFA could develop
a procedure that would guide WIFA staff through the process as they review formu-las
and enter information into the scoring data sheets. Second, WIFA should devel-op
a policy requiring management review of the scoring data sheet information and
formulas for accuracy before the draft intended use plans are distributed for public
comment and before final WIFA board approval. Such reviews can help discover and
correct inadvertent errors within the scoring data sheets.
Recommendations
1. WIFA should develop and implement policies and procedures that WIFA staff
can use when reviewing formulas and entering information into the scoring data
sheets to help ensure their accuracy and completeness, and to help in reduc-ing
errors.
2. WIFA should develop and implement a policy incorporating management review
of its scoring data sheets and formulas prior to the draft intended use plans’ dis-tribution
for public comment and Board approval to help ensure the accuracy of
the information used to allocate funding.
page17
Office of the Auditor General
OTHER PERTINENT
INFORMATION
In response to legislative staff inquiries, auditors developed information on two
national issues affecting Arizona’s water systems: the federal formula used to allo-cate
Clean Water State Revolving Fund monies to the states, and the impact of the
new federal arsenic standard on drinking water systems. Auditors also followed up
on concerns raised by WIFA’s external auditor about weaknesses in WIFA’s financial
reporting and accounting management controls.
Federal clean water allocation formula
The federal Clean Water State Revolving Fund, which provides monies to local water
systems and communities for water and wastewater infrastructure projects, is fund-ed
through annual grants provided by the federal government. Individual state fund-ing
levels are determined by the federal Clean Water Act of 1987. However, the cur-rent
funding levels do not meet some states’ needs, including Arizona’s. As such,
WIFA has had to rely more heavily on alternative sources of funding, such as bonds,
to assist in meeting Arizona’s clean water infrastructure needs. A formula based on
states’ current needs would allow Arizona to receive a significant increase in its annu-al
clean water allocation.
Formula does not reflect Arizona’s current needs—The federal Clean
Water State Revolving Fund, which is described more fully in the Introduction and
Background of this report, distributes an average of $1.35 billion per year to fund
clean water infrastructure projects throughout the country. Arizona’s allocation, 0.68
percent of the total, ranks 37th in the country. This allocation has provided Arizona
with approximately $9 million per year in clean water grants for federal fiscal years
2000 through 2002. Arizona’s allocation percentage, which has remained essential-ly
unchanged for years, is based on a formula that is derived in part from 25-year-old
population data and needs surveys.
Under this formula, Arizona’s clean water allocation falls short of meeting the State’s
water infrastructure needs. According to an analysis of EPA data in a 2002 report by
the Northeast-Midwest Institute, Arizona is one of 14 states that have clean water
infrastructure needs that exceed their annual federal allotments.1 The EPA defines
clean-water “needs” as the estimated 20-year costs for constructing publicly owned
wastewater transportation and treatment facilities or other funding activities specified
in the Clean Water Act. Arizona’s projected 20-year clean-water needs have
increased substantially over the past 10 years, rising from $975 million in 1990 to $6.3
billion in 2000.2 These changes and use of the current allocation methodology have
resulted in a disparity between states’ clean-water needs and their annual alloca-tions.
For example, recent estimates indicate that Arizona and Maryland have similar
populations, and Maryland has less documented clean-water needs than Arizona.3
However, under the current allocation formula, Maryland receives approximately $32
million a year in federal monies, or more than three times Arizona’s allocation of
approximately $9 million.
Arizona’s diminished capacity to meet its needs through
the federal Clean Water State Revolving Fund allocation
has required WIFA to rely more heavily on issuing revenue
bonds. Specifically, WIFA has had to periodically issue rev-enue
bonds to fund loans to address the State’s clean-water
needs, and these bonds need to be repaid with inter-est.
However, regardless of increases in federal clean water
funding, WIFA’s Executive Director indicates WIFA will con-tinue
to issue revenue bonds to facilitate the construction
of water infrastructure projects.
New formula could result in increased federal
funding—Unlike the federal Clean Water State Revolving
Fund, allocations from the federal Drinking Water State
Revolving Fund are based on the most recent Drinking
Water Infrastructure Needs Survey. This fund, also
described in the Introduction and Background of this
report, assists states with drinking water projects rather
than wastewater treatment projects. Should Congress
change the clean water formula to a needs-based formula
similar to the drinking water formula, Arizona would receive
an increase in its clean water federal funding. For example,
Arizona’s drinking-water needs allocation is based on its share of the total 20-year
drinking-water-needs estimate for all states, as reported in the Drinking Water Needs
Survey published in 2001. Based on the reported needs, Arizona currently receives
page18
State of Arizona
Arizona is one of several
states where needs
exceed allocation.
1 The Northeast-Midwest Institute, The Clean Water State Revolving Fund: A Primer, March 2002. The Northeast-Midwest
Institute is a private, nonprofit, and nonpartisan research organization that conducts research and analysis, and provides
evaluations of key federal programs.
2 The $975 million estimate is based on Arizona’s documented 20-year needs as reported in the EPA’s 1990 Clean Water
Needs Survey. The $6.3 billion 20-year needs estimate was submitted by WIFA to the EPA for inclusion in the 2000 Clean
Water Needs Survey.
3 Estimates based on the documented needs reported in the EPA’s 1996 Clean Water Needs Survey. Population compar-isons
are based on the 2000 Census.
Revolving Fund Allocations
Clean Water Allocations—Allocation percentages includ-ed
in the Clean Water Act serve as the basis for allocating
clean water monies to the states. These percentages are
based in part on population and needs survey data from
the 1970s and 1980s. Clean-water needs, as determined
by more recent EPA surveys, are not used as the basis for
allocating clean water monies. The 1996 Clean Water
Needs Survey is the EPA’s most recently published
clean-water needs survey.
Drinking Water Allocations—Allocations from the
Drinking Water State Revolving Fund are based on the
most recent Drinking Water Infrastructure Needs Survey.
States receive funding based on their share of the total
20-year drinking-water needs estimate. The EPA’s most
recent Drinking Water Needs Survey was conducted in
1999 and published in February 2001.
1.13 percent of the total annual drinking water congressional appropriation, which
resulted in a grant of approximately $9.1 million in federal fiscal year 2002.
Allocating clean water monies based on a current needs-based approach could sig-nificantly
increase the amount of federal clean water money for Arizona. According to
WIFA’s 2002 Wastewater, Water Reclamation and Storm Water Infrastructure Needs
Survey, Arizona’s clean water allocation could increase from approximately $9 million
to $45 million annually if the formula were based on the EPA’s most recent Clean
Water Needs Survey. Increased federal funding would require a larger contribution
from the State to meet the 20 percent state matching requirement. As a result, WIFA
would need to provide $9 million in state-matching funds annually, which represents
a $7.2 million increase in matching funds. However, the State General Fund would
not have to provide these monies; rather, WIFA could use bond proceeds to cover
this increased state-matching requirement.
State and federal efforts to change the formula—In the past several years,
there have been various attempts at both the state and federal levels to change the
federal clean water allocation formula. In April 1998, the Arizona Legislature submit-ted
a concurrent memorial to the President and the Congress of the United States
urging them to update the clean water allocation formula to ensure that Arizona
receives funding consistent with its needs. More recently, during the 107th
Congressional Session, congressional delegates introduced legislation in the Senate
(S.1961—Water Investment Act of 2002) and in the House of Representatives (H.R.
3930—Water Quality Financing Act of 2002) that would require the EPA to allocate
clean water appropriations based on the most recent Clean Water Needs Survey,
similar to the method used for the Drinking Water Revolving Fund program. However,
the proposed bills were defeated during the session. Similar legislation proposed by
Arizona’s delegates has also failed. Nevertheless, according to a legislative assistant
for one Arizona senator, the senator plans to continue his efforts to change the clean
water allocation formula to one based on current needs.
page19
Office of the Auditor General
Needs-based allocation
could significantly
increase clean-water
federal monies.
New arsenic standard
In 2001, the EPA established a new standard for arsenic in drinking water to reduce
the health risks associated with arsenic. According to the Arizona Department of
Environmental Quality (ADEQ), this new stan-dard
will potentially affect hundreds of water
systems in Arizona that are not in compliance
and will cost an estimated $565 million to $987
million to comply. As a result, ADEQ has devel-oped
an Arsenic Master Plan to help affected
small water systems identify treatment options
and cost estimates associated with compli-ance.
ADEQ and WIFA plan to coordinate their
efforts to ensure that Arizona’s drinking water
systems comply with the new arsenic standard
and provide these systems with adequate
funding options.
EPA adopts a more stringent arsenic
standard—In January 2001, the EPA
reduced the acceptable level of arsenic in
drinking water from 50 parts per billion (ppb) to
10 ppb. Congress had directed the EPA to
establish a new arsenic standard as part of the
1996 amendments to the federal Safe Drinking
Water Act.1 To determine an appropriate stan-dard,
the EPA worked with the National Research Council (NRC) to study the health
risks associated with exposure to low levels of arsenic in drinking water.2 In a 1999
report, the NRC concluded that the 50 ppb standard did not achieve the EPA’s goal
of protecting public health. The EPA set the new standard at 10 ppb to protect con-sumers
against the effects of long-term, chronic exposure to arsenic in drinking
water. Impacted water systems have until 2006 to bring their drinking water systems
into compliance with the new arsenic rule.
Several thousand water systems across the country serving millions of people will
need to take action to lower the arsenic levels in their drinking water. According to the
EPA, approximately 4,100 of the nation’s 74,000 water systems will need to lower the
current levels of arsenic in their drinking water. Of those affected systems, 97 percent
serve fewer than 10,000 people. These small water systems typically rely on wells for
page20
State of Arizona
Arsenic requirement
changed from 50 to 10
parts per billion (ppb).
1 Congressional Research Service. Arsenic in Drinking Water: Recent Regulatory Development and Issues. August 23,
2001.
2 The National Research Council is part of the National Academies, which also includes the National Academy of Sciences
(NAS). The NRC and NAS are private nonprofit institutions that provide science technology and health policy advice under
a congressional charter.
The contamination of arsenic in drinking water can result from either natural or
human activities. Arsenic occurs naturally in soil, water, plants, and animals.
Agricultural applications, mining, and smelting also contribute to arsenic releas-es
in the environment. According to the Arizona Department of Environmental
Quality, most of the arsenic in Arizona’s drinking water is naturally occurring.
Studies have linked long-term exposure to arsenic in drinking water to cancer of
the bladder, lungs, skin, liver, and prostate. The table below shows the estimated
long-term increased cancer risks associated with arsenic levels in drinking
water.
Arsenic Level in Drinking Water
(in parts per billion, or ppb)
Approximate Total Cancer Risk
5 ppb
10 ppb
20 ppb
1.5 in 1,000
3 in 1,000
6 in 1,000
Source: The National Research Council, Arsenic in Drinking Water: 2001 Update.
Adverse Health Effects of Arsenic
in Drinking Water
drinking water, which tend to have higher levels of arsenic. The EPA estimates that
the new arsenic standard will affect 12.7 million people nationwide and will cost water
systems an estimated $181 million per year for 20 years to address. Compared to
the other states, Western states have more water systems with arsenic levels greater
than 10 ppb. According to ADEQ, Arizona is one of several Western states, including
Nevada and New Mexico, that face significant compliance issues related to the new
arsenic standard.
Arizona’s costs to comply will be significant—The new arsenic standard
will apply to an estimated 1,100 of Arizona’s more than 1,600 water systems, but only
an estimated 320 of these systems will have to take action to lower their levels.
Additionally, according to the EPA’s 1999 Drinking Water Infrastructure Needs Survey,
Arizona estimates it will cost between $565 and $987 million for water systems to
comply with the new standard.1 Larger water systems may have more available
options to pay for the costs of compliance. For example, the City of Scottsdale insti-tuted
a 5 percent water-rate hike for its users and bonding to cover the estimated $64
million in costs to comply with the new arsenic standard. However, the new arsenic
rule will be particularly burdensome for small water systems because these systems
may be unable to increase water rates sufficiently to cover their arsenic compliance
costs. According to ADEQ, 287 out of the 320 affected water systems in the State are
small water systems, and it will cost these 287 systems an estimated total of $142
million to comply with the standard.
Master plan identifies treatment options—To begin addressing these new
requirements, ADEQ formed a stakeholder group in 2002. The group, consisting of
representatives from ADEQ, municipalities, and the scientific community, was formed
to develop an Arizona Arsenic Master Plan (master plan). The master plan was fund-ed
through a $50,000 grant from WIFA and identifies appropriate arsenic treatment
options, corresponding costs, and potential funding sources for affected water sys-tems
serving fewer than 10,000 persons. Although the master plan focuses on small
groundwater systems, ADEQ believes that the report will also provide useful infor-mation
for larger systems. The master plan identifies two basic categories of options
for affected water systems:
􀁺􇨜 “Nontreatment” Options—Nontreatment options consist of blending treated
water, consolidating water sources, or replacing existing water sources with new
sources. According to the master plan, nontreatment options tend to be more
economical, and easier to implement and manage than the treatment options
described below.
􀁺􇩔 Treatment Options—Water systems that cannot use nontreatment options may
choose treatment options that either filter or absorb arsenic. According to the
master plan, treatment options include reverse osmosis, which filters arsenic; or
activated alumina, a treatment method that absorbs arsenic. The EPA classifies
some of these treatment technologies as the best-available technologies, which
page21
Office of the Auditor General
1 Arizona’s arsenic estimate reported in the separate state estimates section of the EPA’s 1999 Drinking Water Infrastructure
Needs Survey published in February 2001.
Arizona compliance
costs could reach near-ly
$1 billion.
ADEQ highly recommends using. According to the master plan, treatment
options have the tendency to be more expensive to implement and more com-plicated
to manage than nontreatment options.
Although the estimated costs associated with the new arsenic standard are sub-stantial,
Congress has not provided additional funding to the states to assist with
compliance costs. Therefore, small water systems will be turning to one of several
available funding sources. The federal Safe Drinking Water Act allows states to use
federal Drinking Water State Revolving Fund monies to fund some costs of compli-ance.
As a result, WIFA will provide loans and grants through its Drinking Water
Revolving Fund program to cover some of the arsenic compliance costs incurred by
Arizona’s water systems. According to WIFA’s Executive Director, while only a few
water systems have applied for financial assistance as of December 2002, he antic-ipates
that more water systems will submit applications for arsenic compliance fund-ing
as the 2006 deadline approaches. In addition to WIFA, water systems can apply
for financial assistance from several other sources, including the U.S. Department of
Agriculture—Rural Utilities Service, and the North American Free Trade Agreement’s
(NAFTA) Border Environment Cooperation Commission.
WIFA and ADEQ will coordinate efforts—WIFA and ADEQ plan to coordinate
efforts to address funding and compliance issues associated with the new arsenic
standard. Specifically, WIFA will serve as the primary source for prioritizing water sys-tem
projects and funding arsenic treatment projects through its
Drinking Water Revolving Fund programs. WIFA will also assist ADEQ
with identifying funding options for water systems in Arizona as part
of the Arsenic Master Plan.
ADEQ plans to continue its efforts to ensure water systems are in
compliance with the new arsenic standard. Specifically, administra-tive
rules require water systems to periodically test the arsenic levels
in their drinking water and report the results of those arsenic tests to
ADEQ. Also, according to ADEQ’s Safe Drinking Water Manager,
ADEQ plans to monitor arsenic compliance through the Public Water
System Supervision program and provide technical assistance
regarding arsenic compliance to water systems.
ADEQ will also be responsible for granting extensions to the 2006
arsenic standard deadline to eligible water systems. In order to qual-ify
for an arsenic standard extension, a water system must demon-strate
that various conditions exist that prevent it from complying by
the compliance date.
page22
State of Arizona
􀁺􇩔 The extension will not result in an unreason-able
risk to public health.
􀁺􇩎 Necessary capital improvements cannot be
completed before January 2006.
􀁺􇨠 The water system does not have a reason-ably
available alternative source of water
that can be used to achieve compliance
with the arsenic standard.
􀁺􇩔 The water system is unable to comply with
the arsenic standard because of compelling
factors, which may include economic fac-tors.
Source: Arizona Department of Environmental Quality Arsenic Master
Plan.
Selected ADEQ Conditions
for Extensions To the
New Arsenic Rule
Water systems will have
several funding options
available.
Concerns about WIFA internal controls
During the fiscal year 2001 and 2002 financial audits, WIFA’s external auditors iden-tified
opportunities for WIFA to strengthen its internal controls over its accounting and
financial reporting systems. Additionally, WIFA did not meet the statutory deadlines
for submitting its final fiscal year 2002 audited financial statements. In response to
these issues, the Auditor General has scheduled a review of WIFA’s internal financial
controls in 2003.
Internal control weaknesses identified—While conducting fiscal year 2001
and 2002 financial audits, WIFA’s external auditors noted weaknesses in WIFA’s
accounting and financial reporting systems. Specifically, for the fiscal year 2002 audit,
WIFA’s external auditors reported that daily and monthly accounting procedures were
not consistently followed and accounting procedures were not performed in a time-ly
manner. Additionally, the external auditors reported that accounting entries lacked
sufficient information to reconcile and to fully explain account balances in both the
fiscal year 2001 and 2002 financial audits. The external auditors detailed the internal
control concerns, along with recommendations for improvement, in separate letters
to WIFA management.
An effective internal control system is necessary to help ensure the reliability of an
entity’s financial reporting, to ensure compliance with laws and regulations, and to
help protect against fraud or error. Further, internal controls need to be monitored to
ensure that staff follow policies and procedures for the accounting and reporting of
financial information. WIFA’s executive director has acknowledged the need to
improve WIFA’s internal controls and increase his level of involvement in the account-ing
and financial reporting process. Additionally, WIFA has hired staff to assist in
accounting for WIFA’s fiscal activities and is in the process of implementing a new
automated accounting system to improve the effectiveness of its internal controls
and plans to implement this system by August 2003.
WIFA missed statutory financial reporting deadlines—Although statute
requires WIFA to submit audited financial statements within specified deadlines,
WIFA was unable to meet these deadlines for its final fiscal year 2002 statements.
Specifically, A.R.S. §49-1204 requires WIFA to submit its audited financial statements
to the Auditor General immediately after 120 days from the end of the fiscal year.
Additionally, A.R.S. §35-131(H) requires applicable state entities to submit financial
statements in accordance with Department of Administration (DOA) policies and pro-cedures.
Specifically, the Department required WIFA to submit its final fiscal year
2002 financial statements by December 2, 2002. WIFA missed both of these report-ing
dates. According to WIFA’s executive director, ongoing issues related to the
absence of key personnel and WIFA’s outdated financial reporting structure, coupled
with management’s attempts to implement a new automated accounting system,
caused WIFA to miss these deadlines for submitting its final financial statements.
page23
Office of the Auditor General
External auditors identi-fied
several internal
control weaknesses.
State statute requires WIFA to submit its financial statements within a specified time-frame
because DOA must include this information in required state and federal finan-cial
reports. In response to WIFA’s missed deadline, DOA officials met with WIFA to
establish a new deadline for the submission of WIFA’s audited financial statements.
DOA required WIFA to submit its financial statements by February 24, 2003, and WIFA
met this deadline.
The Auditor General will conduct a review—In response to these various
issues, the Auditor General’s financial audit division has scheduled a review of WIFA’s
internal controls in 2003. The review will assess the effectiveness of WIFA’s internal
accounting and financial reporting controls as well as the adequacy of management
oversight, and will include an assessment of WIFA’s management directives,
accounting policies and procedures, and monitoring activities.
page24
State of Arizona
page25
Office of the Auditor General
In accordance with A.R.S. §41-2954, the Legislature should consider the following 12
factors in determining whether the Water Infrastructure Finance Authority (WIFA)
should be continued or terminated.
1. The objective and purpose of establishing WIFA.
The Legislature established WIFA in 1997. WIFA serves as a separate legal enti-ty
of the State, authorized to provide financial assistance for projects related to
the construction or improvement of drinking water, wastewater, or other water
quality facility projects. WIFA’s mission is as follows:
“To maintain and improve water quality in Arizona by providing financial assis-tance
and technical assistance for basic water infrastructure.”
In support of its mission, WIFA provides financial assistance to Arizona’s com-munities
through three main programs:
􀁺􇩃 Clean Water Revolving Fund program—As the State’s designated admin-istrator
of this program, WIFA receives federal grant monies to provide low-interest
rate loans to publicly held wastewater facility projects. Monies may
be used to plan, engineer, construct, upgrade, and/or equip wastewater
treatment of water reclamation facilities.
􀁺􇩄 Drinking Water Revolving Fund program—As the State’s designated
administrator of this program, WIFA receives federal grant monies to pro-vide
low-interest rate loans to public and private drinking water systems.
Funds may be used to plan, engineer, construct, upgrade, and/or equip
drinking water facilities. WIFA passes-through some of these federal monies
to the Arizona Department of Environmental Quality to separately adminis-ter
three drinking water programs (see page 7).
􀁺􇩔 Technical Assistance Program—Through this program, WIFA provides pre-design
and design grants and loans for eligible wastewater and drinking
SUNSET FACTORS
water systems. Eligible grant recipients must serve populations of 10,000 or
fewer. Funding for these grants is provided through the two revolving fund
programs.
2. The effectiveness with which WIFA has met its objective and purpose and the
efficiency with which it has operated.
WIFA has effectively met its overall objective and purpose. Since 1989, WIFA and
its predecessor have provided approximately $479 million in water infrastructure
loans to communities and water systems throughout Arizona. In addition to
administering and distributing federal grants, WIFA periodically issues revenue
bonds to fund loans. WIFA has approximately $241.9 million in outstanding bond
debt as of June 30, 2002. In 2001, national credit rating agencies awarded a
AAA rating, the highest possible rating, to WIFA’s revenue bonds. High credit rat-ings
allow WIFA to sell its bonds at lower interest rates, which in turn help WIFA
to provide low-cost financial assistance to communities. Additionally, WIFA’s
standardized application process complies with federal requirements for priori-tizing
and funding wastewater and drinking water projects and assists in the
consistent review of these projects.
Although WIFA has developed a standard application review process, it has not
formally established an appropriate level of review to ensure the accuracy of the
scoring data sheets it uses to score and prioritize water infrastructure projects.
As a result, WIFA initially inaccurately scored more than 90 percent of the proj-ect
applications it received for the 2003 funding cycle, which could have affect-ed
WIFA’s lending capacity and the communities that receive its loans. Similar
errors were not identified by auditors in their review of the 2002 funding cycle
scoring data sheets. To improve its process for determining the level of assis-tance
to provide to communities, WIFA should establish additional policies and
procedures to help ensure that it uses accurate information when prioritizing
these projects and determining the subsidized financial assistance they will
receive (see Finding 1, pages 11 through 16).
Finally, WIFA must have written agreements with the EPA to administer the Clean
Water Revolving Fund and Drinking Water Revolving Fund programs. While
WIFA has a current agreement with the EPA for the Drinking Water Revolving
Fund, its agreement to administer the Clean Water Revolving Fund has expired.
According to an EPA official, the agreement is reactivated with each grant
awarded; however, an updated written agreement is needed. Therefore, WIFA
should update and renew its Clean Water Revolving Fund agreement with the
EPA.
page26
State of Arizona
WIFA should renew its
Clean Water Revolving
Fund agreement with
the EPA.
page27
Office of the Auditor General
3. The extent to which WIFA has operated within the public interest.
WIFA has operated in the public interest by providing below-market loans and
grants to local communities, private water systems, and Native American tribes
for critical drinking water and wastewater infrastructure projects. Since its incep-tion,
WIFA has funded numerous projects designed to improve the quality of
Arizona’s drinking water and wastewater infrastructure. Specifically, during the
2002 funding cycle, WIFA provided approximately $94.6 million in clean water
financial assistance, approximately $19.7 million in drinking water financial
assistance, and approximately $426,000 in technical assistance grants.
To ensure that WIFA serves the public’s interest, WIFA is governed by a 12- mem-ber
board of directors (Board). The Board comprises representatives from sev-eral
state agencies, large and small communities, sanitation districts, and Native
American tribes. Pursuant to A.R.S. §49-1202, WIFA board members cannot
have a direct or indirect personal financial interest in any clean water or drinking
water project financed by WIFA.
However, WIFA does not follow state guidelines regarding conflict-of-interest dis-closures
for its board members. Conflicts potentially arise, for example, when
the Board votes on projects for systems that serve the board members or their
relatives. The Attorney General advises in the Arizona Agency Handbook that
“any public officer or employee who has a conflict of interest in any agency deci-sion
or in the award of a contract must disclose that interest in the agency’s spe-cial
conflict-of-interest file. A.R.S. §38-503(A), (B).” Additionally, A.R.S. §38-509
requires public agencies to maintain a special file for documents related to con-flict-
of-interest disclosures. According to WIFA’s executive director, board meet-ing
minutes serve as public notice when board members refrain from voting due
to conflicts of interest. A review of board meeting minutes for 2001 and 2002
found four instances where board members had refrained from voting. However,
if meeting minutes are used, A.R.S. §38-502(3) requires they provide a descrip-tion
of the conflict. WIFA’s board meeting minutes do not provide that descrip-tion,
nor does WIFA maintain a special file for conflict disclosure documents as
required by statute. Therefore, WIFA should ensure that its meeting minutes pro-vide
a detailed description of any disclosed conflict and establish a special file
for retaining board meeting minutes that disclose conflicts of interest.
Further, external reviews of WIFA’s financial systems have identified opportuni-ties
for WIFA to strengthen its internal controls. Specifically, WIFA’s external audi-tors
noted that daily and monthly accounting procedures were not consistently
followed, accounting procedures were not performed in a timely manner, and
that accounting entries lacked sufficient information. Additionally, WIFA was
unable to meet the statutory deadlines for submitting its final fiscal year 2002
audited financial statements. In response to these issues, the Auditor General
WIFA should follow state
guidelines for conflict of
interest disclosures.
page28
State of Arizona
has scheduled a review of WIFA’s financial accounting and reporting internal
controls in 2003 (see Other Pertinent Information, pages 23 through 24).
4. The extent to which rules adopted by WIFA are consistent with legislative man-date.
At the request of the Office of the Auditor General, the Governor’s Regulatory
Review Council (GRRC) reviewed WIFA’s rules and determined that WIFA has
established all rules that are specifically required by statute or necessary to limit
or define its function. Additionally, WIFA submitted its 5-year rule review report to
GRRC on December 31, 2002, as required by statute.
5. The extent to which WIFA has encouraged input from the public before adopt-ing
its rules, and to the extent to which it has informed the public as to its actions
and their expected impact on the public.
WIFA reports that it has encouraged public input in drafting its proposed rules.
For example, WIFA held a public meeting in September 2001 to obtain public
comment and input regarding its most recent rule revisions. WIFA indicated that
it follows the guidelines established by the GRRC regarding public hearings for
proposed rules and will continue to follow this process for rule revisions pro-posed
in its 5-year rule review report.
To further facilitate public input into its activities, WIFA provides stakeholders with
draft versions of its annual intended use plans, which detail project priority lists
and proposed uses of funds for the clean water, drinking water, and technical
assistance programs. WIFA also holds public hearings for its draft intended-use
plans to solicit and incorporate public comments. In fact, WIFA held a public
meeting in November 2002 to solicit public comment on its 2003 funding cycle
intended use plans for the Clean Water Revolving Fund and Drinking Water
Revolving Fund programs. Additionally, WIFA holds periodic workshops and
training sessions to help communities navigate the application and funding
process.
WIFA reports that it has complied with the State’s open meeting laws by posting
public meeting notices at least 24 hours in advance at the required locations and
making agendas available to the public. However, WIFA has not filed the
required statement with the Secretary of State indicating where meeting notices
will be posted, but should do so.
WIFA should file the
required statement on
where meeting notices
will be posted.
page29
Office of the Auditor General
6. The extent to which WIFA has been able to investigate and resolve complaints
that are within its jurisdiction.
WIFA does not have the authority to investigate and resolve complaints.
7. The extent to which the Attorney General or any other applicable agency of state
government has the authority to prosecute actions under the enabling legisla-tion.
A.R.S. §49-1226 and A.R.S. §49-1246 give the Attorney General’s Office the
authority to assist WIFA in enforcing financial assistance agreement provisions
and collecting delinquent loan payments as necessary.
8. The extent to which WIFA has addressed deficiencies in its enabling statutes
which prevent it from fulfilling its statutory mandate.
Several changes have been made to WIFA statutes in recent years, some of
which have enhanced WIFA’s ability to fulfill its statutory mandate. For example:
􀁺􇩌 Laws 1998, Chapter 72 provides WIFA with greater flexibility in structuring,
issuing, and managing revenue bonds. This legislation gave WIFA the abil-ity
to restructure its bond debt in 1999, which resulted in WIFA receiving a
AAA bond rating (the highest possible rating) from national credit rating
agencies.
􀁺􇩌 Laws 2001, Chapter 250 grants authority to WIFA to intercept a municipali-ty’s
state-shared revenues in the event of a default on a WIFA loan by the
borrower (intercept authority). State-shared revenues are monies that the
State collects and then disburses to Arizona communities according to var-ious
statutory requirements and formulas.
􀁺􇨠 Laws 2001, Chapter 250 also authorizes WIFA to provide planning and
design loans to local governments prior to local debt authorization to facil-itate
project development and public input.
In future legislative sessions, WIFA plans to request action on two matters. First,
it plans to request a change in statute regarding its intercept authority for state-shared
revenues. Currently, both WIFA and the Greater Arizona Development
Authority (GADA) have authority to intercept such revenues in the event that bor-rowers
default.1 While statute does specify that GADA and WIFA should enter
into an inter-creditor agreement if a borrower defaults and owes money to both
authorities, WIFA reports that it will continue its efforts to statutorily enhance its
intercept coordination with GADA. Second, WIFA plans to propose legislation to
1 The Greater Arizona Development Authority provides financial assistance to counties, cities, towns, special districts, and
Native American tribes for constructing or improving infrastructure such as parks, public safety buildings, and telecom-munications
services.
page30
State of Arizona
expand its hardship grants program to both drinking water and wastewater proj-ects.
The hardship grants program provides financial assistance to designated
disadvantaged communities for wastewater infrastructure projects.
9. The extent to which changes are necessary in the laws of WIFA to adequately
comply with the factors listed in the Sunset law.
Audit work did not identify any needed changes to WIFA’s statutes.
10. The extent to which termination of WIFA would significantly harm the public
health, safety, or welfare.
Terminating WIFA could harm the public’s health, safety, and welfare since WIFA
provides valuable, low-cost financial assistance to Arizona’s communities for
drinking water and wastewater infrastructure improvement projects. If WIFA were
terminated and its functions not transferred to another entity, this low-cost finan-cial
assistance might not be available to Arizona’s communities and water sys-tems,
which could result in the public paying more for drinking water and waste-water
infrastructure improvement projects. Additionally, some communities may
be unable to finance projects on their own and the public could suffer from the
potential decline in water quality.
If the State were to terminate WIFA, it would have to address certain statutory
provisions. Specifically, federal laws require each state to designate an admin-istrator
for the Clean Water and Drinking Water State Revolving Funds, but do
not specify a particular type of agency or entity. Therefore, the Legislature could
designate another state entity to assume WIFA’s responsibilities if WIFA were ter-minated.
However, provisions outlined in A.R.S. §41-3004.19 specify that the Legislature
cannot terminate WIFA if it has a contractual obligation with any federal agency
or outstanding debts. WIFA currently has a written agreement with the EPA for
the administration of the Drinking Water Revolving Fund program, but needs to
renew its agreement to administer the Clean Water Revolving Fund program.
Additionally, WIFA has approximately $241.9 million in outstanding bond debt as
of June 30, 2002. If the Legislature terminated WIFA, certain provisions would
have to be made to transfer the operating agreement with the EPA to another
state entity and pay or retire WIFA’s bond debt.
11. The extent to which the level of regulation exercised by WIFA is appropriate and
whether less or more stringent levels of regulation would be appropriate.
This factor does not apply since WIFA does not have regulatory authority.
12. The extent to which WIFA has used private contractors in the performance of its
duties and how effective use of private contractors could be accomplished.
According to A.R.S. §49-1203(B)(10), WIFA can contract for the services of out-side
advisors, attorneys, consultants, and aides to assist it in performing its
duties. As a result, WIFA reports that it relies on private contractors in all phases
of project conception, development, and financing. The following are examples
of services provided by some of WIFA’s private contractors:
􀁺􇩆 Financial advisors—WIFA contracts with financial advisors to assist with the
preparation, management, and coordination of its bond issues. This assis-tance
includes making recommendations for investing bond proceeds and
structuring debt and repayment schedules.
􀁺􇩐 Private attorneys—WIFA also contracts with a private attorney firm to assist
with the preparation of the official bond statements and provide legal
advice regarding the language in WIFA’s loan agreements. To issue and
market bonds, WIFA must use specialized attorneys that have developed
the necessary expertise to provide an objective legal opinion concerning
the issuance and sale of the bonds, including the sources of payment and
security for the bond issue.1
􀁺􇩔 Trustee—WIFA contracts with a trustee, US Bank, to administer its approx-imately
$78 million in guaranteed investment contracts, which are contracts
signed with financial institutions guaranteeing a specified rate of return on
investments. As part of its bond issuance requirements, WIFA must main-tain
a reserve for the bonds it issues, and these reserves are held in the
guaranteed investment contracts.
􀁺􇩅 External auditors—WIFA contracts with a public accounting firm to perform
an annual financial audit of its funds as required by A.R.S. §49-1204(A).
􀁺􇩔 Technical Assistance Providers—WIFA and its borrowers contract with
engineering and financial firms to review, plan, and design WIFA-funded
financial and technical assistance projects.
This audit did not identify any further uses for private contractors.
page31
1 “Selection of Bond Counsel.” Michigan Department of Treasury. 4 Feb. 2003. <http://www.michigan.gov/treas-ury/
0,1607,7-121-1752_2235_2238-5898--,00.html>.
Office of the Auditor General
page32
State of Arizona
Office of the Auditor General
AGENCY RESPONSE
Water Infrastructure Finance Authority of Arizona
Janet Napolitano, Governor
April 21, 2003
Debra K. Davenport, Auditor General
Office of the Auditor General
2910 N. 44th Street, Suite 410
Phoenix, Arizona 85018
Ms. Davenport:
On behalf of the Board of Directors of the Water Infrastructure Finance Authority of
Arizona (WIFA), I am pleased to submit the attached response to the Office of the Auditor
General's WIFA Performance Audit Report. I am particularly pleased that the revised
Performance Audit Report incorporated many of the conclusions from our April 4, 2003
meeting and incorporated many concerns within WIFA's April 8, 2003 correspondence.
I believe the tone of the Report is constructive, productive, and objective and will serve
WIFA well as we continue to automate our internal financial management systems. We look
forward to demonstrating our progress during follow-up reviews.
Sincerely,
Greg Swartz, Executive Director
Water Infrastructure Finance Authority
WIFA
1110 West Washington
Suite 290
Phoenix, AZ 85007
Telephone (602) 364-1310
Fax (602) 364-1327
1-877-298-0425
Arizona's Water
and Wastewater
Funding Source
cc: Dale Chapman, Melanie Chesney, Andrea Leder, Bill Thomson, Jessica Tucker
Water Infrastructure Finance Authority of Arizona
Response to Performance Audit Report
Submitted to the Auditor General
April 21, 2003
2
Water Infrastructure Finance Authority of Arizona
Response to Performance Audit Report
Introduction
The Performance Audit Report (henceforth, the “Report”) by the Office of Auditor General (OAG)
includes three substantive components – Audit Findings, Other Pertinent Information, and Sunset
Factors. The Water Infrastructure Finance Authority (WIFA) will respond to OAG recommendations
and issues by report component below.
WIFA’s Response to Audit Findings
The OAG identified and addressed one audit finding relating to the accuracy of priority scores within
WIFA’s 2003 Funding Cycle project priority lists. The OAG recommended that WIFA implement
policies and procedures to ensure accuracy of scores used to generate project priority lists.
It is essential and factual to note that scoring errors noted in the OAG Report concerned draft scores on
draft priority lists for the 2003 Funding Cycle. WIFA’s Board of Directors adopts final priority lists
following public and comment. Subsequently, WIFA’s Board of Directors considers and awards
funding only after an applicant submits a detailed Project Finance Application and after staff complete a
due diligence report on the applicant. In effect, there are multiple reviews and opportunities to correct
omissions and errors prior to a Board action on a loan request.
Given the distinction between draft priority lists, final priority lists, and Board actions to award funding,
WIFA contends that it is unlikely that draft scoring errors can translate into incorrect interest rates and
subsidies within loan agreements. Regardless of the low probability of compounded errors, WIFA
believes enhancing procedures to reduce errors will increase confidence in the process and outcome.
Accordingly, the finding of the Auditor General is agreed to and the audit recommendation will
be implemented as outlined below.
To enhance procedures for scoring projects on the draft priority list, WIFA will:
1. Clarify procedures to ensure consistent scoring. Implementation Deadline: September 30, 2003
2. As part of WIFA’s ongoing automation effort, automate priority list scoring process with business
rules governing scoring separate from application data input. Implementation Timeline: November
30, 2003
3. Require staff to certify priority list scores. Implementation Timeline: November, 2003.
4. Require Project Priority Committee (subset of Board members) approval of draft priority lists prior
to public review and comment. Implementation Deadline: November 30, 2003
WIFA’s Response to Other Pertinent Information
Within the Other Pertinent Information component of the Report, the OAG reported on three issues:
􀂃􈌠 Federal Clean Water (Revolving Fund) Allocation Formula
􀂃􈌠 New Arsenic Standard
􀂃􈌠 Concerns about WIFA Internal Controls
WIFA will separately respond to each of the three issues as detailed below.
3
Federal Clean Water (Revolving Fund) Allocation Formula
WIFA will continue to coordinate with the Governor’s Office and the Congressional Delegation to
encourage Congress to adopt a needs-based formula to allocate CWRF funding.
New Arsenic Standard
WIFA was pleased to assist the Arizona Department of Environmental Quality in generating the
Arsenic Master Plan and looks forward to the challenge of providing financial assistance to those
water systems affected by the new arsenic standard.
Concerns about WIFA Internal Controls
In accordance with state statute, WIFA must secure the services of an external auditor and generate
annual audited financial statements. The OAG noted concerns about WIFA’s Internal Controls
based on statements from external auditors associated with the 2001 and 2002 audits.
It is essential and factual to note that WIFA’s accounting system simply summarizes transactions
initiated and occurring within accounting systems managed by the State of Arizona and WIFA’s
Trustee. Presently, WIFA has no authority to independently withdraw, deposit, or transfer funds
outside of the State of Arizona and Trustee accounting systems. Furthermore, all withdraws,
deposits, and transfers must conform to Federal, State, and WIFA Master Indenture requirements.
WIFA maintains a redundant “shadow” accounting system, including a general ledger, to summarize
transactions controlled elsewhere, to categorize the data in a manner consistent with accounting
standards, to compute net worth, and to facilitate reporting of the data. In effect, given the
parameters under which WIFA operates, the possibility of fraud or deceit is very remote.
WIFA agrees it must continue to improve its internal financial controls through automation,
retaining skilled, experienced, and motivated staff, and by adopting relevant policies and procedures.
However, the concerns about internal controls and ability to meet reporting deadlines must be
viewed within the context of the unique challenges facing WIFA’s FY 2002 Audit.
Simply put, it is reasonable to view the FY 2002 Audit as an anomaly. More specifically, during the
July 1 through December 31, 2002 period, the following concurrent events impacted WIFA :
􀂃􈌠 WIFA’s Move to New Office Space
􀂃􈌠 Absence of Key WIFA Fiscal Personnel
􀂃􈌠 Implementation of a New General Ledger Accounting Structure
􀂃􈌠 New WIFA Controller (In response to he FY 2001 Audit, WIFA’s Board authorized the creation of a new
Controller position in April, 2002 and management filled the position in July, 2002.)
􀂃􈌠 New WIFA Environmental Manager and Environmental Coordinator (Staff responsible for technical
and environmental issues occupied their positions for less than six months with no prior priority list experience.)
􀂃􈌠 5 Year Rule Review (WIFA analyzed its rules and made recommendations for improvements to comply with
a December 31, 2002 deadline from the Governor’s Regulatory Review Council.)
􀂃􈌠 FY 2002 Financial Audit
􀂃􈌠 Sunset/Performance Audit
􀂃􈌠 Arbitrage Audit
􀂃􈌠 Ongoing Automation Efforts
􀂃􈌠 Change in Trustee
Simply put, during the period July through December, 2002, WIFA was overwhelmed and targeted
4
resources as best it could under unique circumstances. The unfortunate consequence – concerns
about internal controls and ability to meet reporting deadlines – was the direct result of this
overwhelming workload and reliance on new staff to perform unfamiliar tasks.
Given the above circumstances, WIFA’s Executive Director delayed the final audited financial
statements to ensure financial accuracy, compliance with GASB 34, and to meet the higher standard
resulting from WIFA’s financial statements becoming material, for the first time due to increasing
fund balances, within the State’s Comprehensive Annual Financial Report.
Looking to the future, the need for comprehensive and integrated financial software applications
constitutes the greatest challenge to improve WIFA’s internal controls and reporting capability.
Accordingly, WIFA continues to design, implement, and deploy software applications to automate
day-to-day fiscal and program functions.
Since July, 2002 until present, the Authority implemented the following fiscal software applications:
• Fixed Asset Management,
• Interim Loan Servicing (interim until comprehensively integrated with all fiscal applications),
• Federal Capital Contributions, and
• Grant Management
WIFA will implement the following critical and integrated fiscal applications by July 1, 2003:
• Deposits,
• Withdraws,
• Transfers,
• Investment Management,
• Debt Management,
• State Match Management,
• Accounting Structure (governs and automates transactions within and between accounts), and
• General Ledger (vast majority of data reported within general ledger will be entered as transactions within other
fiscal applications; direct general ledger entries will be limited to non-cash transactions and end of year adjustments
such as bond cost amortizations).
In conclusion, WIFA continues to make dramatic progress to implement customized fiscal software
applications that interface within WIFA as well as with the State and Trustee accounting systems.
WIFA’s Response to Sunset Factors
In accordance with A.R.S. 41-2954, OAG reviewed12 “Sunset Factors” and noted three issues:
􀂃􈌠 WIFA should renew its CWRF Operating Agreement with EPA.
􀂃􈌠 WIFA must enhance procedures for disclosing Board members conflicts of interest.
􀂃􈌠 WIFA must file required public meeting notice statement with the Secretary of State.
For each of the above, the finding of the Auditor General is agreed to and audit recommendation
will be implemented (renew CWRF Operating Agreement) or has been implemented (disclose
conflicts of interest and public meeting notice statement).
02-01 Arizona Works
02-02 Arizona State Lottery
Commission
02-03 Department of Economic
Security—Kinship Foster Care
and Kinship Care Pilot
Program
02-04 State Parks Board—
Heritage Fund
02-05 Arizona Health Care Cost
Containment System—
Member Services Division
02-06 Arizona Health Care Cost
Containment System—Rate
Setting Processes
02-07 Arizona Health Care Cost
Containment System—Medical
Services Contracting
02-08 Arizona Health Care Cost
Containment System—
Quality of Care
02-09 Arizona Health Care Cost
Containment System—
Sunset Factors
02-10 Department of Economic
Security—Division of Children,
Youth and Families, Child
Protective Services
02-11 Department of Health
Services—Health Start
Program
02-12 HB2003 Children’s Behavioral
Health Services Monies
02-13 Department of Health
Services—Office of Long Term
Care
03-01 Government Information
Technology Agency—
State-wide Technology
Contracting Issues
03-02 Registrar of Contractors
Performance Audit Division reports issued within the last 12 months
Future Performance Audit Division reports
Department of Commerce
State Board of Funeral Directors and Embalmers
Electric Deregulation