State policy initiatives for assisting communities in managing, financing, and regulating water supplies are discussed. States can provide either direct assistance through grants or loans, or act as intermediaries to lend their stronger credit support to communities that otherwise would not have access to the national credit markets. The choice of the specific aid mechanism depends on the state's financial position and on its program objectives. Financial assistance alone, however, may be insufficient to resolve the more fundamental institutional problems that hamper provision of drinking water. Several states have tied financial aid programs to incentives for reforming local management practices. Others have initiated programs with the sole purpose of encouraging improved water resource management. Finally, if water supply problems are critical, states may regulate management practices and use of local water supplies. Includes tables, figure.