(1) The department has, in addition to all other powers and duties imposed upon it by law, the powers and duties provided in this section as follows:

(a) To assist suppliers of water that serve a population of not more than five thousand people with meeting their responsibilities with respect to protection of public health, the department, in the name of the state and to the extent that state funds are appropriated therefor, may enter into contracts with both governmental agencies and not-for-profit public water systems, as defined in section 25-1.5-201 (1), or with counties representing unincorporated areas that serve a population of not more than five thousand people, to grant moneys for the planning, design, and construction of public water systems.

(a.5) To assist domestic wastewater treatment works, as defined in section 25-8-103 (5), that serve a population of not more than five thousand people with meeting their responsibilities with respect to the protection of public health and water quality, the department, in the name of the state and to the extent that state funds are appropriated therefor, may enter into contracts with governmental agencies, or with counties representing unincorporated areas that serve a population of not more than five thousand people, to grant moneys for eligible projects as defined in section 25-8-701 (2).

(b) The department may use up to five percent of the appropriated funds for the administration and management of such project grants.

(2) The water quality control commission shall promulgate rules for the administration of any appropriated grant moneys pursuant to this section and for prioritizing proposed public water systems and domestic wastewater treatment works based upon public health impacts and water quality protection. The department shall authorize grants based on water quality needs and public health-related problems. The commission shall promulgate a project categorization system for use in determining the relative priority of proposed projects. The department shall review applications for state funds and may approve only those applications that are consistent with the project categorization system.

(3) During the grant application process, the department shall seek from the division of local government in the department of local affairs a fiscal analysis of the applying entity to determine financial need. Based upon its fiscal analysis, the division of local government shall issue or deny a certificate of financial need. If a certificate of financial need is issued, the department may authorize a state grant to the project in accordance with the project prioritization adopted by the department.

(4) (a) There is hereby created in the state treasury the small communities water and wastewater grant fund, referred to in this subsection (4) as the "fund". The fund shall consist of moneys transferred pursuant to section 39-29-109 (2)(a)(III), C.R.S., and any other moneys transferred to the fund by the general assembly. The fund shall be used only for grants made pursuant to this section. All income derived from the deposit and investment of the moneys in the fund shall be credited to the fund. At the end of each fiscal year, all unexpended and unencumbered moneys in the fund shall remain in the fund and shall not revert to the general fund or to any other fund.

(b) The revenues in the fund are continuously appropriated to the department for the purposes of this section.