The U.S. Environmental Protection Agency will provide a $34 million federal loan to help upgrade a stormwater system in Daly City, aiming to reduce flooding that affects communities in San Mateo County, the agency’s officials said Tuesday.

The low-interest loan, issued through the agency’s Water Infrastructure Finance and Innovation Act program, will support the Vista Grande Drainage Basin Improvement Project led by the Daly City Joint Powers Financing Authority. The project will expand stormwater capacity and reroute runoff to Lake Merced, helping stabilize water levels and improve regional water quality, the EPA said in a news release.

Planned upgrades include replacing an undersized canal, enlarging an existing tunnel, improving an overflow system connected to the lake and constructing a new outlet structure to the Pacific Ocean.

A map of the Lake Merced Compensatory Mitigation Project shows habitat restoration sites around the lake that are taking place to offset environmental impacts from Daly City’s Vista Grande Drainage Basin Improvement Project. The work began in September 2025 and is scheduled for completion by the end of April 2026. It affects about 10 acres of shoreline habitat spread over 14 sites. (City of Daly City)

EPA officials said the financing structure allows the authority to draw funds as needed, lowering upfront costs and saving about $2.6 million over the life of the loan. Construction and operations tied to the project are expected to create roughly 500 jobs.

“This project will deliver critical water infrastructure upgrades to better protect San Mateo County communities from flooding, stabilize Lake Merced’s water levels and improve regional water quality,” EPA Pacific Southwest Region Water Division Director Tomas Torres said in a statement released by the agency.