The picturesque Cache Valley community of Smithfield looks like a marvelous place to live, but it doesn't smell like one.

Raw sewage runs down the gutters and irrigation ditches and foul-smelling waste has been surfacing in back yards and basements because of an increasing number of septic tank failures during the past several years.Of the 73 billion gallons of wastewater Utahns dispose of each year, a significant portion can't be disposed of adequately - or legally.

"It was a mess," said city engineer Jim Gass. "There were times when families couldn't flush the toilets more than two or three times a day. People got real innovative as to how to get rid of it. But you could still smell it as you walked down the street."

Smithfield is now constructing a $10 million sewer system to meet the needs of the town's 5,500 residents. Smithfield is lucky: It is one of the last communities in the state to get in on the tail end of a state loan/federal grant program that will pay for a good share of those construction costs.

Dozens of other Utah communities are not so lucky. Small towns that have relied on septic tanks are facing serious health and environmental hazards as raw sewage oozes above ground.

Cities like St. George and Logan have been cited for violating federal environmental standards because existing sewer systems are wearing out or working beyond capacity. And other towns and cities - some large, some small - are under threat of sanctions by the Environmental Protection Agency.

Dozens of Utah communities are on a collision course with the EPA, and few - if any - communities have the financial resources to bring their sewer systems up to federally mandated standards.

A $50 million proposal before the Utah Legislature would rejuvenate a state revolving loan program and make needed construction funds available to financially strapped local governments.

But the measure has a questionable future, even though a Senate bill introduced this session has 19 co-sponsors. And if no funds are available to the state to loan to communities, chances are the sewer problems will not be solved.

The state's 39 highest-priority wastewater projects - those that absolutely must be taken care of immediately - would cost $77.9 million. And the total jumps to $358 million if you add in other "current" wastewater needs.

By the year 2008, the cost of solving wastewater problems is expected to reach $1.01 billion.

The state has about 1.7 million unused dollars in its revolving loan fund and another $35 million in use. Federal funds in a separate loan fund controlled by the state total $16 million, all of which is committed.

Communities with wastewater treatment plants that are out of compliance with EPA standards almost certainly face fines, according to Max Dodson, EPA water division director in Denver.

Whether the EPA would impose fines on individual homeowners whose septic tanks fail, causing sewage problems that violate federal standards, is a question the EPA shies away from.

"You would have to ask me that," Dodson said. "There doesn't seem to be any relief in sight for these small communities. I'm real concerned about that."

State officials are concerned, too, because they administer the EPA's programs in Utah and are charged with enforcing penalties attached to violations. If the state doesn't prosecute violators, costly federal litigation can follow.

The situation was much different in 1972 when a federal grant program was implemented to pay for new construction that brought many treatment plants into compliance with the Clean Water Act. The grants also helped pay for new state-of-the art plants like the $128 million Central Valley and $42.6 million South Valley regional reclamation facilities in Salt Lake County that completely replaced aging facilities, said Ken Alkema, Director of the Division of Environmental Health.

The grant program had as much available as $5 billion annually when it was first started. But federal budget-cutting is taking its toll, and the program began a transition in 1987 to one that will be loans-only by 1991. Utah now has the option of using all of its federal money for either loans or grants, but only the money it lends will help build the loan pool once the federal money is cut off in 1991, said Don Ostler, director of the Bureau of Water Pollution Control.

Either way, when the state uses federal money it must use a 20 percent match from state funds available without federal restrictions. The result is a gradual transfer from the state's unrestricted pool to restricted federal funds.

The overall appropriations to the wastewater program began shrinking when the shift from grants to loans was made. Last year's budget appropriation was $2.4 billion nationally; the fiscal 1989 appropriation is 1.8 billion.

Utah has received between $250 million and $350 million since 1972, and has had annual appropriations of as much as $22 million per year and as little as $2 million per year, Ostler said.

The trend makes it obvious how good the deal was back in the federal grant days.

"We looked at a sewer system in 1979," Gass said. "We were looking at 75 percent EPA funding, less stringent discharge rules and $14- to $15-a-month bills. And we turned it down."

Now, Smithfield is looking at building a much more expensive system, to meet much stricter standards. And they are looking at $25-a-month bills - bills that would have been twice that without the interest-free loans from the state.

"It started at $60 a month, but with state assistance, we were able to get it down," he said.

EPA officials like Dodson are quick to compliment Utah's foresight in setting up the state loan program long before the federal phase-out began. "If you want to know how to run a water pollution program, come to Utah," he said from Denver. "It was one of the first states to develop state loan programs for drinking water, and wastewater. It was used to develop the national model."

Official compliments aside, the state is facing a crisis problem: how to fund hundreds of millions of dollars in needed projects with a fraction of the needed working capital.

Utah communities are also caught in a Catch-22 in that while federal funds have dried up, the EPA has beefed up its enforcement of environmental standards. And those violations will stand regardless of whether there is money to remedy problems.

Dodson said he recognizes that can put the state in an awkward position of requiring compliance when no money is available to help a violator solve its problem. And if the problem persists - as it has - then the EPA steps in.

"If there's a significant violation, the EPA sends out a notice of violation that will go to the discharger as well as the state. We leave it up to the state to make the initial response on that violation," Dodson said.

If quarterly reports sent from the state to the EPA don't show that problems have been remedied, "that will probably get an administrative order response from EPA, which could involve a penalty," Dodson said.

Fines and lawsuits are likely in the most extreme cases, but Dodson said the agency prefers to find administrative remedies to solve problems - like loaning money to make improvements.

The so-called administrative remedy takes the state back to square one if the community can't afford to bond for its improvements, or if it can't get loan or grant money from the state.