The DWSRF Funding Cliff Is Here: How Asset Data Can Help Water Utilities Compete

Key Takeaways:

• Who: Municipal water utilities that borrow from their state’s Drinking Water State Revolving Fund (DWSRF)
• What: Federal fiscal year 2027 is the first year the DWSRF gets no Infrastructure Investment and Jobs Act (IIJA) supplemental funding; lead pipe replacement compliance obligations begin November 1, 2027
• Benefit: With less money available, current asset, condition and cost data helps make a stronger case on the state’s priority list and document costs for reimbursement

Since the 2022 fiscal year, the Infrastructure Investment and Jobs Act (IIJA) has layered billions of supplemental dollars onto the State Revolving Funds. The United States Environmental Protection Agency’s (EPA) latest announcement put $6.2 billion toward states, Tribes and territories for the 2026 fiscal year across the Clean Water and Drinking Water State Revolving Funds (SRFs).

That era is ending. Federal fiscal year 2027 began on October 1, 2026, and it’s the first year the Drinking Water State Revolving Fund (DWSRF) receives no IIJA supplemental funding. The need hasn’t shrunk: the EPA estimates drinking water needs at $625 billion over 20 years, and federal lead pipe rules take effect in 2027. Utilities will need to show state programs clearly why their projects should rank first.

What Is The DWSRF?

The DWSRF is the primary federal financing program for drinking water infrastructure. Here’s how it works:

1. Congress appropriates funds each year.
2. The EPA allots them to states based on its Drinking Water Infrastructure Needs Survey and Assessment (DWINSA), with each state receiving at least 1%.
3. States add a 20% match and may reserve up to about 31% of the grant for set-asides such as administration, technical assistance and capacity development.
4. States lend the balance at below-market rates. Some assistance can come as principal forgiveness, generally for disadvantaged communities.
5. Repayments flow back into the fund to finance new projects.

Eligible projects include treatment, storage, transmission and distribution mains, source improvements and lead service line replacement. Utilities apply through their state DWSRF program, which publishes an Intended Use Plan (IUP) and ranks projects using its own priority system.

What Is The DWSRF Funding Cliff?

The DWSRF funding cliff is the drop in federal drinking water infrastructure money that begins in fiscal year 2027, the first year since FY2022 that the Drinking Water State Revolving Fund receives no supplemental funding from the Infrastructure Investment and Jobs Act (IIJA). Without IIJA dollars, the program depends on regular annual appropriations, a growing share of which Congress directs to earmarked projects, leaving less for states to lend through their priority lists. The cliff arrives just as lead service line replacement obligations under the Lead and Copper Rule Improvements take effect on November 1, 2027.

The 2026 fiscal year brought the final IIJA lead service line tranche: $3 billion appropriated, of which $2.875 billion was allotted to states in May 2026 after Congress redirected $125 million to wildfire programs. Under the new rule, systems must replace lead pipes within 10 years and keep their service line inventories up to date.

The need is far larger than the funding. The seventh DWINSA estimated $625 billion in needs over 20 years, about $31 billion a year. The 2026 fiscal year’s roughly $6.8 billion in total DWSRF funding, including the final lead pipe tranche, covered about one-fifth of that. The eighth DWINSA, now underway, will set future state allotments.

How Do States Rank DWSRF Projects?

The Safe Drinking Water Act (SDWA) requires states to give priority to projects that address the most serious risks to human health, ensure compliance, and assist the systems most in need on a per-household basis. 

Borrowers must also have the technical, managerial and financial capability to comply with the SDWA. DWSRF assistance is typically paid as reimbursement, so local governments will need to incur and document eligible costs before they’re paid.

Can DWSRF Pay For Asset Management Software?

Yes, in some cases, but only through specific routes and with state approval. The EPA DWSRF Eligibility Handbook lists asset management software as an eligible cost. Each state makes the final decision.

What Data Do State Reviewers Look For?

Source: DWSRF Eligibility Handbook (June 2017)

The handbook does not address cloud software subscriptions directly. It says states should judge operating versus capital costs on a case-by-case basis, so each state decides whether recurring fees qualify. 

Before relying on DWSRF funds, local governments should confirm their water system is an eligible borrower, ask their state program in writing whether specific software or services qualify, and include approved costs in the project budget before incurring them. The handbook is dated 2017 and labeled provisional, so states may be able to apply newer guidance.

PSD Citywide helps local governments build a stronger application by putting the evidence state reviewers look for in one place. The table below maps each scoring area to the data that supports it and where that data lives in Citywide: 

How To Prepare For Your Next DWSRF Application

Each state sets its own DWSRF application schedule, so the first step is knowing when your state’s next window closes. As of October 2026, here’s where three programs stand:

For all other states, find your program on EPA’s State DWSRF Website and Contacts page and check its current Intended Use Plan for the application timeline.

Once you know your deadline, work through these steps:

1. Read the IUP’s project scoring criteria
2. Ask whether set-aside technical assistance is available for asset management
3. Update asset registry, condition and risk data for candidate projects
4. Reconcile your service line inventory ahead of November 2027
5. Refresh your long-range capital plan and rate documentation

As of October 2026, fiscal year 2027 funding remains unsettled. A stopgap funding bill (P.L. 119-103) keeps the government funded through December 11, 2026, and the House FY2027 bill gives the drinking water fund $910 million, $215 million less than this year, while separately drawing $1.03 billion for 1,197 earmarked projects from the same account. The pressure is already visible in FY2026: of roughly $1.13 billion in regular yearly funding for the drinking water fund, $715 million (about 64%) was earmarked, leaving only about $411 million for states to distribute by formula (CRS IF13177). Once IIJA money runs out, that formula share is what utilities will compete for on state priority lists.

With lead service line requirements taking effect November 1, 2027, the gap between need and available funding will only widen. Utilities that start documenting what they own, its condition and what it will cost to fix now will be the ones ready to compete for what’s left.

Is Your Asset Data Ready For Your DWSRF Application?

DWSRF timelines change every year. The PSD Citywide newsletter keeps you up to date on funding opportunities for your asset management projects.