Reference Materials
Developing a Convincing Benefit- Cost Analysis for Grants Stephen R. Galati, CGW, CP APMP
November 22, 2013 AGWA Annual Conference This page is intentionally blank. Discussion Agenda
. What is a BCA? . Why is a BCA Important? . Case Study . MBTA Drawbridge Grant BCA . Grant Project Conditions (Obstacles, Timeframe, resource Restraints, etc.) . What Discussions Should a BCA Contain? . Case Study Reprise . Visualizing the Project . Understanding who will be impacted by the Project . Conducting the Data Collection and Analysis . Doing the Math… . Understanding and Calculating Present Value, Net Present Value, Discounts, and the Benefit-Cost Ratios . Wrapping Everything Up with a Persuasive Bow . Conclusion: So did we Win the MBTA Drawbridge Grant?
. Further Reading and Resources 2 Stephen R. Galati, CGW, CP APMP
Presenter Bio
. Author of “Geographic Information Systems Demystified” published by Artech House http://www.artechhouse.com/Main/Books/Geographic-Information-Systems-Demystified- 883.aspx
. An Excerpt from “Starscraper” - Engineering News Record magazine’s Imagining the Future – Construction Science Fiction Collection http://enr.construction.com/opinions/viewpoint/2013/1104-Construction-Science-Fiction- Starcraper-An-Excerpt.asp
. Author of “Understanding Cyber Security and How it Affects Federal Grant Writing” in the August 2013 issue of FUNDED http://grantsoffice.com/Portals/0/funded/issues/FUNDEDAug2013.pdf
. Author of “Exploring the UASI Nonprofit Security Grant Program” in the December 2011 issue of FUNDED http://grantsoffice.com/Portals/0/funded/issues/FUNDEDDec2011.pdf
3 Stephen R. Galati, CGW, CP APMP
Stephen Galati is the Manager of National Proposals with TRC Environmental Corporation working out of Augusta, Maine. He has 20 years of proposal management, technical writing, grant writing, marketing communications, training and course
development, and electrical engineering experience throughout the United States and
for global opportunities.
He is the author of Geographic Information Systems Demystified, a textbook published by Artech House, and has numerous publications to his credit concerning environmental consulting, proposal writing, grant management, and public / private funding.
He is currently finishing his Doctorate Degree in Management with the University of Phoenix, and holds a Master’s Degree in English Rhetoric from the City University of New York, a Bachelor’s Degree in Electrical Engineering from Pratt Institute, an Associate’s Degree in Liberal Arts and Science from the City University of New York, and Presenter a Professional Development Certificate in Emergency Management from the FEMA Institute.
He currently holds two Field of Interest Chairs for the American Grant30% Writers Association covering the Environment and Homeland Security, and is a Chemical- Terrorism Vulnerability Information (CVI) Authorized User. of total NSR An excerpt from his short story “Starscraper” was recently selected for inclusion in Engineering News Record magazine’s Imagining the Future – Construction Science Fiction Collection. 4 Resources and BCA Examples
. Further Reading . Resources . Available BCA Examples
5 Further Reading and Resources
White House – OMB Circular A-94 http://www.whitehouse.gov/omb/circulars_a094#1
FEMA Benefit Cost Analysis Reference Guide http://www.fema.gov/media-library/assets/documents/22970?id=4830
FEMA Benefit-Cost Analysis Tool http://www.fema.gov/benefit-cost-analysis
US DOT - TIGER Benefit-Cost Analysis Resource Guide
http://www.dot.gov/sites/dot.dev/files/docs/USDOT%20BCA%20Guidance.pdf Resources
TCRP Report 78: Estimating the Benefits and Costs of Public Transit Projects: A Guide for Practitioners 30% http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp78/guidebook/tcrp78.pdf of total NSR
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Further Reading and Resources (continued)
Pricing the Priceless: Cost Benefit Analysis of Environmental Protection http://ase.tufts.edu/gdae/publications/c-b%20pamphlet%20final.pdf
McPherson, E. G., Simpson, J. R., Peper,P. J., & Xiao, Q. (1999). Benefit-cost analysis of Modesto’s municipal urban forest. Journal of Arboriculture, 25(5), 235-248. Retrieved from http://www.fs.fed.us/psw/programs/uesd/uep/products/cufr_36_Modesto%20JOA. pdf
Milan School Cost Benefit Analysis of Investment Projects (European) http://www.csilmilano.com/Summer-School/downlds/guide2008_en.pdf Resources San José State University, Department of Economics – An Introduction to Cost Benefit Analysis. 30% http://www.sjsu.edu/faculty/watkins/cba.htm of total NSR
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Available BCA Examples
Lawrence, S., & Mears, D. P. (2004). Benefit-cost analysis of supermax prisons: Critical steps
and considerations. Urban Institute – Justice Policy Center. Retrieved from http://www.urban.org/UploadedPDF/411047_Supermax.pdf
Neponset River Greenway Corridor – Completion Project TIGER Application http://www.env.state.ma.us/Neponset_River_Greenway_Corridor/Documents/NepCorApp.pdf
Wilson, B. M. (2013). Benefit cost analysis: Boise Foothills open space conservation serial levy. Marylhurst University. Retrieved from http://www.idahoconservation.org/issues/land/foothills-protection-bca-boise
Examples City of Hartford, CT – Hartford’s Intermodal Triangle Project TIGER IV Application http://planning.hartford.gov/Oneplan/Transit%20Center/TIGER%20IV/Appendix.pdf
Benefit-Cost Analysis Port Canaveral Cargo Berth Expansion, TIGER IV Grant Application BCA http://portcanaveral.com/tigerIV/pdf/Port%20Canaveral%20Benefits%20Cost%20Analysis%2030% TIGER%204.pdf
USDOT - TIGER Benefit-Cost Analysis Examples of total NSR http://www.dot.gov/sites/dot.dev/files/docs/TIGER-bca-examples-03-06-12.pdf
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Case Study - Benefit Cost Analysis
Massachusetts Bay Transportation Authority (MBTA) Annisquam Railroad Drawbridge Project
9 Benefit Cost Analysis The Benefit Cost Analysis looks at the Annisquam River drawbridge project from the standpoint of society as a whole, and accounts for the net benefits and net costs based on the criteria described in the TIGER IV Grant Notice of Funding Availability. The analysis seeks to answer the question, “Is society better off with the project or without the project?” The analysis addresses travel time savings, operating and maintenance costs and savings, emission reduction, and economic development. Benefit Cost Ratios have been estimated on an annual basis for 30 years, beginning in 2012 and discounted to present value at the alternative rates of 3% and 7%. Future dollar values were also adjusted for projected inflation at a rate of 2.0% per annum. The proposed project has a Benefit Cost Ratio of 12.5 and 18.8 based upon discount rates of 7% and 3%.
The full analysis can be found in Attachment #1: Benefit Cost Ratio Analysis, a spreadsheet supplement to this application. A summary of the results of this analysis follows indicating the benefit cost ratio and monetized values for both discounted rates on the project. MBTA Tiger Grant 30 Year Benefit Grant Selection Criteria Discount Rate Discount Rate Net Present Value (NPV) 7% 3% Travel Time Savings State of Good Repair $38.7 million $40.3 million Saved Revenue for State of Good Repair, $5.0 million $5.2 million Maintained Ridership Sustainability Layover Facility State of Good Repair, $12.0 million $12.5 million Construction Savings Livability Retained Tourism and Sustainability, Livability $1.4 billion $1.5 billion Tax Revenue Emissions Savings Sustainability, Livability $0.7 million $0.7 million Total Benefits $1.5 billion $1.5 billion NPV of Total Benefits $581.1 million $976.9
MBTA Tiger IV Grant $25,140,000 MBTA Matching Fund $16,760,000 Benefit Cost Ratio 12.5 18.8
Costs Project Costs Total project costs to replace the existing Annisquam River drawbridge are as follows:
Total Estimated Project Costs: $41,900,000 Bridge Design $2,500,000 Construction Costs $31,100,000 Inspections $2,500,000 Force Account $2,000,000 Contingency $3,800,000
It is anticipated that this project will be funded through 60% TIGER IV funding ($25.14 million) and 40% MBTA matching fund ($16.76 million).
State of Good Repair The existing bridge was built in 1911 and is located on the MBTA Newburyport/Rockport commuter line approximately 400 feet west of Gloucester station. It is 73 feet 10 inches ± long with a fixed steel stringer span and Strauss trunnion bascule span that incorporates a fixed steel stringer span. The skew at each abutment is 0°. The fixed span is 27 feet and consists of stringers and steel framing that supports the main trunnion (on which the bascule leaf rotates). The bascule leaf is 46 feet 10 inches. Each span carries two MBTA commuter rail tracks. To the west of the bridge is a 2,200 foot causeway, while to the east of the bridge is an approximately 140 foot long timber trestle. There are two tracks used for the commuter rail. The tracks switch to single track about a quarter mile east of the bascule, before Gloucester commuter rail station.
Due to the age of the bridge, ongoing maintenance and operations costs are significant. Bridge safety is also a major concern since it is ranked in a 2010 inspection report as the worst physically in the MBTA commuter rail system. The annual average maintenance and operations costs amount to $550,200 per year for personnel, repairs, and materials. If the bridge were closed these costs are avoided. According to MBTA’s design and inspection consultant, the existing bridge is in need of a complete structural overhaul and would need to be closed within 2 years.
The existing bridge has a bascule span to allow for boat traffic. Navigability on this section of the Annisquam River is extremely important, especially for the US Coast Guard and vessels traversing to the Western and Inner Harbors of Gloucester and to Gloucester Harbor. If the structure was not removed after closure, and the bascule section becomes inoperable, vessels, including US Coast Guard, could not pass under it. When fully open, the bridge provides approximately 40 feet of usable channel width (between the fenders) without vertical restriction. However, when closed, the bridge minimum vertical navigation clearance is 16 feet 4 inches.
Safety issues would remain and MBTA speed restrictions would remain in-place until the bridge is deemed unsafe and dismantled. The current quarterly structural inspections would also remain intact. A “no replace” scenario is not a realistic possibility, since Federal protection on navigable channels would probably require removal of the obstruction. A “no replace” scenario would also involve no MBTA service between the West Gloucester and Rockport stations, leaving passengers to use other means of surface transportation. Structure removal costs can only be estimated at this time given uncertainties surrounding operational timeframes and efforts to minimize impacts to the environmentally sensitive areas around the bridge. A ballpark estimate is $4,300,000, based on estimated staged demolition costs from MBTA’s design and inspection consultant. This removal cost is not included in this analysis since it would occur in both the “no replace” and “replace” options, therefore it becomes a wash.
Maintenance and Operational Costs The existing Annisquam River drawbridge is riddled with safety concerns, an ever increasing need for emergency repairs, and general operational requirements. The maintenance involves machinists, electricians and carpenters for maintenance and emergency repair of the drawbridge mechanical-electrical components. Such components include motors, gear boxes, limit switches, rotary limit switches, encoder, generator, generator shack, lights, navigational lights, fenders, Piers, Motor Control Center (MCC), drive cabinet, programmable logic control (PLC), operator station, tower repairs, stair repairs, 200 amp electrical service for 480 volts, DC Drive Cabinet, electronic speed control, walkways, deck, handrails, PA system, counter weight maintenance, and pile maintenance. Other necessary maintenance costs also include quarterly inspections, including electrical, bridge structure and underwater inspections, and general bridge painting.
Necessary materials used in repairs include: steel, electronic drive cards, grease, bolts, and other miscellaneous material. The operational costs include draw tenders for year round coverage 24/7. Incidentally, this operational cost will be the same for the old and new bridges, and are omitted from this benefit cost analysis. According to the MBTA, the average maintenance and operational costs for the existing drawbridge is approximately $550,800 per year; however, the costs of the operation and maintenance of the new drawbridge are lower, averaging approximately $457,800 per year - $92,400 per year less than the existing bridge. If the bridge is replace, the operations and maintenance costs during construction will lessen by a third, due to the cessation of drawbridge operations for four months out of the year.
“No Replace” Option The MBTA wants to continue service from the West Gloucester station to Gloucester station, and over the Annisquam River drawbridge into the Rockport station. Without adequate funding, MBTA would be forced to a “No Replace” option. This option presents the need for definitive actions with not replacing the existing drawbridge and the unfortunate outcomes of not having service reach the Gloucester and Rockport stations. These necessary actions and resulting outcomes are detailed below.
Public Safety and Environmental Concerns MBTA recognized the absolute need to replace the existing Annisquam River drawbridge after underwater and structural inspections showed safety issues with the aging structure. MBTA employed emergency repairs, moved train traffic to only one of the two existing tracks, and slowed down the speed of commuter rail going over the bridge tracks by half. Under this “No Replace” option, these safety actions will remain intact for the life of the bridge.
Ultimately, MBTA has deemed the replacement of the existing drawbridge a “safety critical” project. This means that MBTA, with confirmation from their independent inspection consultant, believe the existing structure is a public safety concern. Without replacement, the existing structure has an anticipated lifespan of two years contingent upon continued satisfying quarterly or more frequent underwater, structural, and electrical/mechanical inspections, and continued maintenance and repairs. As discussed earlier, the annual average maintenance and operations costs of the existing drawbridge, including operation, inspection, repair and materials, is approximately $550,800 per year. This per annum cost is anticipated to rise during the next two years of operation given the costs of structure maintenance, costs of emergency repairs, and the cost of the demolition.
If the existing drawbridge remains in-place with the “no replace” option taken, the MBTA in the best interest of public and environmental safety would 1) stop all MBTA commuter service over the bridge; 2) close down the bridge to all access; 3) eliminate the current and increasing operational and maintenance costs to the bridge; and 4) demolish the bridge. MBTA acknowledges that with the “no replace” option, they could not continue to use the existing bridge for commuters, which severely impacts their service line, their ridership, and public waterway access below the bridge. The environmental concerns for the current drawbridge include possible bridge structure failures that can impact the environmentally sensitive area associated with the Annisquam River underneath the bridge span.
Stoppage of MBTA Commuter Rail Service to Gloucester and Rockport Stations As discussed, MBTA would immediately close the existing bridge to all traffic and access under the “no replace” option. This closure would commence a stoppage of MBTA commuter rail service to Gloucester and Rockport Stations. MBTA would terminate the current MBTA Newburyport/Rockport commuter line at the West Gloucester station, given the station’s accessible location and current capacity. However, to support the true capacity of a terminal station on the widely-used rail line, the West Gloucester station will require immediate infrastructure changes to the station, commuter parking area, and overall layover capacity. MBTA would experience lost revenue from the reduced ridership between the West Gloucester and Rockport Lines. Of particular concern is the current West Gloucester commuter parking area, which, if increased to handle a greater commuter capacity, would be placed next to environmentally sensitive wetlands.
Need for a Layover Facility at West Gloucester Station With the MBTA stopping service past the West Gloucester station on the MBTA’s Newburyport/Rockport commuter line, commuters will need an additional parking capacity at the West Gloucester station to park personal vehicles. This poses a serious problem at the current location. Stated earlier is the environmental concern rising from the immediate need to expand the current West Gloucester commuter parking area, which would be placed next to environmentally sensitive wetland area. This type of expansion of the parking capacity is impracticable due to the capacity needed to cover the significant increase in parked commuter automobiles. MBTA acknowledges the numerous environmental, safety, and area obstacles related to this expansion and deemed this potential station upgrade unrealistic. MBTA’s solution to this “no replace” option is to build a new layover facility at or near the West Gloucester station.
A new layover facility would be required immediately upon selecting this “no replace” option and making the West Gloucester station the terminal station for the commuter line. MBTA projects that the construction alone for a new layover facility at the West Gloucester station would cost approximately $9 million. This projection is based upon other construction estimates for MBTA layover facilities, including the facility initially planned for the Rockport station and the new Wachusett layover facility for the MBTA’s Fitchburg line.
Aside for the pure construction costs, a new West Gloucester layover facility would incur many other costs from the planning and design to pre-construction to post-construction operations and maintenance. These costs include, but are not limited to, real estate acquisition, environmental impact studies and permitting, noise mitigation, communication lines, signaling, and power. MBTA would also incur the continued yearly costs of yard maintenance, facility operations and maintenance, and security. MBTA projects, based on other constructed facilities, that the costs for a new layover would reach $12.9 million through the construction phase and $1.1 million for continued operation and maintenance each year. MBTA anticipates the facility’s land acquisition and construction to be expedited to 1.5 years.
Attachment #2: “No Replace” Option – Layover Facility Costs highlights the costs cost of having to construct and maintain a new station layover facility through a 30-year duration. The tables below summarize the projected costs for this facility.
Total Estimated Layover Facility Construction Costs: $12,900,000 Construction Costs, $9,000,000 including environmental, permitting, and noise mitigation. Real Estate Acquisition $3,900,000
Projected Layover Facility Operations and Maintenance Costs O&M per Year, including $1,100,000 staff, power, security, operations, and maintenance yard. 30-Year Duration $56,121,458
Lost Revenue for Reduced Ridership As indicated, stoppage of MBTA commuter rail service over the bridge and making the West Gloucester station as the terminus for the line will severely impact ridership and create lost revenue for MBTA. Based on February 2009 MBTA ridership numbers, daily commuter rail boardings at the Rockport station is 390 passengers and 438 passengers at the Gloucester station. Resultantly, MBTA’s Newburyport/Rockport commuter line would experience a decrease of 828 passengers, at a minimum, on a daily basis between the West Gloucester and Rockport stations. Yearly, MBTA would experience an approximate decrease in ridership of 302,220 passengers along with the fare revenue associated with those commuters between the West Gloucester and Rockport stations.
Given that the West Gloucester and Gloucester stations are in MBTA’s fare Zone 7 ($7.25 per ride) and the Rockport station is in MBTA’s fare Zone 8 ($7.75 per ride), MBTA on a conservative measure would experience a loss in revenue of $0.50 per passenger ride per day. This equates to $414.00 daily and $151,110.00 per current year.
Over a 30-year duration, MBTA would experience greater fare revenue losses due to ridership growth yearly. MBTA has run detailed projections of ridership growth on the Rockport/Newburyport Line from a 2008 baseline to a set of 2030 projections. MBTA calculated projected ridership growth on baseline, moderate, and aggressive scenarios. For the purposes of this Benefit Cost Analysis, we will use the conservative (baseline) projections for our breakdown. See the following table for a summary of MBTA’s findings related to ridership growth on the Rockport/Newburyport Line.
Projected Ridership Growth Rockport/Newburyport Weekly Weekly Weekly Weekly Annual Line Line Ridership Year Inbound Outbound Total Factor1 Boardings 2008 Base Case 8,900 8,900 17,800 324.28 5,772,150 2030 Baseline Scenario 10900 10900 21800 324.28 7,069,260
Growth from 2008-20302 22.5% 22.5% 22.5% 22.5% Notes 1 MBTA’s “Weekly Factor” takes into consideration the typical weekly inbound and outbound ridership, as well as Saturday, Sunday, and Holiday ridership on the line. 2 MBTA’s projected growth from 2008 to 2030 for the entire Rockport/Newburyport is assumed to be identical to the ridership growth between the West Gloucester and Rockport stations. This equates to a projected growth of 0.936% each year.
Assuming that any MBTA fare increase in the next thirty years would be proportional to the current fare distribution among the current fare zones, MBTA would continue to experience a loss in revenue of $0.50 per passenger ride per day. Attachment #3: “No Replace” Option Lost Fare and Ridership details the anticipated MBTA lost revenue and ridership over the 30-year duration of this Benefit Cost Analysis. This table shows a total fare loss of $5,330,158.35.
Increased Travel Time for Commuters Without any MBTA service from West Gloucester station to the Rockport station, commuters will have to rely on other forms of transportation to get from one location to another. Since there is no other MBTA rail line servicing Rockport, commuters will need to take passenger vehicles for this stretch of their commute. The following map shows the most time efficient commute route between the terminal station of West Gloucester to the Rockport station. All maps and directions are provided from Google, Inc.
As indicated, commuters would need to drive 6.7 miles along Massachusetts Routes 133 and 127 to get from one station to another. This passenger vehicle commute would take approximately 15 minutes on a typical day driving time with an additional 5 minutes to walk between the train and car parking. The MBTA Newburyport/Rockport line generally follows a schedule of 13 minutes from West Gloucester to Rockport. Under the best circumstances, each passenger would experience an additional 7 minutes each way on their commute.
The following table highlights breakdown of lost travel time for the next few years and the total 30-year duration. Ultimately, the “No Replace” option will make MBTA commuters lose more than 74.6 million minutes (nearly 1.25 million hours) with extra travel time.
“No Replace” Option - Lost Travel Time Time Frame Lost MBTA Lost Travel Total Lost Ridership Time per Travel Time (per year) Rider (minutes) (minutes) 2012 151,110 7.0 1,057,770 2013 305,049 7.0 2,135,343 2014 307,904 7.0 2,155,328
Total over 30 years 10,660,317 74,622,219
Lost Tourism and Tax Revenue Related North Shore / Essex County Community Impacts The drawbridge and MBTA’s commuter service to Rockport station are instrumental to the continued success and growth of the North Shore communities’ tourism. With roughly 70 miles of coastline and over 30 beaches to visit, North Shore attractions and natural beauty make it a favorite destination of tourists. In fact, the North Shore is host to millions of visitors every year. Tourism thrives in this area from the beaches and historic ports to whale watching, shopping, galleries, restaurants, and waterfront views. Having access to these North Shore communities is imperative to the area’s tourism income and economic development.
This “safety-critical” drawbridge project restores a critical infrastructure element in the transportation network between Boston and Cape Ann/North Shore communities. Boston and its metro area are among the top ten tourist destinations in the U.S.; the commuter rail network provides a more direct, convenient link than the regional highway system to many of the North Shore/Cape Ann communities including Rockport, Gloucester, Beverly and Salem.
The MBTA Rockport Commuter Rail Line serves the communities within the metro Boston area Northeast corridor. According the MBTA’s Program for Mass Transportation long-range plan, thirty-two (32) cities and towns comprise the corridor which had a population of 590,368 in 2000. According to the Metropolitan Area Planning Council, corridor population is projected to increase 18% to 693,995 in 2030; employment is estimated to increase by 15%.
In 2010, according to North of Boston Convention and Visitors Bureau, approximately $2.7 million tourists visited the North Shore region. Tourism in Essex County, which is based on 2010 data from the Massachusetts Office of Travel and Tourism, supports over 6,000 jobs and $165 million dollars in payroll. Domestic travelers to the area alone spend nearly $700 million dollars in Essex County, and generate $17 million dollars in local taxes. If the drawbridge was not replaced (“no replace” option) and commuter access to the North Shore communities was eliminated, the community tourism and economic development would hold severe impacts to the local tourism and tax revenue. It is projected that roughly 20-25% of all tourists enter the North Shore Region through MBTA commuter rail service from the Boston area. Often visitors stay in Boston and use public transportation to visit North of Boston. Without a commuter rail service, the area would experience a minimum projected 5% loss of tourism and tax revenue. This equates to approximately $35 million lost tourism income and $850,000 in local taxes. This lost revenue also holds economic impact on the residents of the area, although such projections can only be qualitative in nature.
“Replace” Option Given that the Annisquam River drawbridge project is considered by MBTA to be a “Safety Critical” project, the replacement option offers the best overall cost benefits. We have already detailed the severe results of the “no replace” option to this safety critical project, including public safety issues, environmental concerns, MBTA forced commuter stoppage, layover facility infrastructure needs, lost ridership, lost fare revenue, increased commuter travel times, and adverse community impacts. Alternatively, the “replace” option offers various cost benefits including travel time savings, saved revenue from maintained ridership, emissions savings, and the potential for area economic development.
Travel Time Savings The existing Annisquam River drawbridge in Gloucester was built in 1911 and was deemed in a 2010 safety study as being in the worst physical shape of all bridges in the MBTA commuter rail system. Consequently due to bridge safety concerns, MBTA imposed a rail speed restriction for the commuter trains going over the bridge to 10 mph, literally half of the 20 mph normal rail speed. This speed reduction is in effect for as long as the existing bridge is in use. As a result, the MBTA Newburyport/Rockport commuter line incurred less commuter rail trains and more passenger time delays.
The bridge carries commuter rail passenger service on the Rockport line. To the east of the bridge, service is provided to Gloucester and Rockport stations, where the rail line ends. During weekdays, an average of 26 trains per day now crosses the bridge (an average of 13 trains per day Northbound and 13 trains per day Southbound). During weekends, an average of 14 trains per day crosses the bridge (an average of 7 trains per day Northbound and 7 trains per day Southbound). The average current commuter time between the Gloucester and Rockport stations is 8 minutes. The “replace” option will allow trains to go faster, reducing the time between the Gloucester and Rockport stations to 4 minutes (4 minute savings).
Building the new drawbridge will allow MBTA to disband the speed restriction and provide normal 20 mph commuter rail service to its customers. As implied, the result will be faster trains crossing the bridge on a daily basis with faster commute times. With this “replace” option, commuters will benefit from the travel time savings that was marked as lost time in the “no replace” option. These inherent travel time savings for passengers are quantified in Attachment #4: “Replace” Option - Travel Time Savings, and summarized with projected discounts in the table below.
Summary of “Replace” Option Travel Time Savings Time Frame Retained MBTA Travel Time Total Travel All Purposes Yearly Travel Ridership Saved per Time Saved Intercity Time Value (per year) Rider (minutes) Travel Value (minutes) 1 (per person- hour) 2 2012 151,110 13.0 1,964,430 $18.00 $589,329 2013 305,049 13.0 3,965,634 $18.00 $1,189,690 2014 307,904 13.0 4,002,752 $18.00 $1,200,826
Total Cost Benefit 10,660,317 138,584,117 $18.00 $41,575,235.10 over 30 years 3% Discount $40,327,978 7% Discount $38,664,969 Notes 1 Travel Time saved per Rider is the 7 minutes lost in the “no replace” option plus the 4 minutes saves with the 20 mph commuter rail trains over the bridge. 2 Based on recommended hourly values of travel time savings as outlined in U.S. DOT’s TIGER Benefit-Cost Analysis (BCA) Resource Guide updated 2/1/2012, retrieved at http://www.dot.gov/tiger/docs/tiger-12_bca- resourceGuide.pdf. The recommended All Purposes, Surface Mode, Intercity Travel Value of $18.00 per person-hour was used in the calculation.
Saved Revenue for Maintained Ridership A significant cost benefit of the “replace” option is the continued MBTA fares from commuters. With a new drawbridge, MBTA can sustain its projected ridership growth of 0.936% per year over the West Gloucester station to Rockport station rail line and not have to experience the $0.50 per passenger ride per day loss in revenue. This is a significant cost benefit of the “replace” option. Over the 30-year duration of this Benefit Cost Analysis, a total saved revenue for maintained ridership is $5,330,158 undiscounted (3% Discount: $5,170,254; 7% Discount: $4,957,047).
Layover Facility Savings Under the “replace” option, the MBTA Newburyport/Rockport commuter line will continue to terminate at the Rockport station. This eliminates the need and costs for a new layover facility at the West Gloucester station. These facility construction, operations, and maintenance savings are true benefits to the “replace” option. The table below summarizes the 30-year cost benefit with and without discounts. Attachment #2 details the costs required for constructing and maintaining a layover facility; however, since this build option enables MBTA to not have to undertake this construction project, these layover construction costs are considered a benefit to this “replace” option.
Projected Layover Facility Construction Benefits Total Cost Benefit of not $12,900,000 Constructing the Projected Layover Facility 3% Discount $12,513,000 7% Discount $11,997,000
Emissions Savings There exist inherent emission savings with the replacement of the existing drawbridge. As stated earlier, the existing drawbridge would be out-of-commission and decommissioned immediately upon selection of the “no replace” option, leaving commuters without a direct means of transportation between the terminal West Gloucester station and the Rockport station. Possible commuter solutions would include other forms of public transportation, such as buses, and personal vehicles. Use of personal vehicles would increase local emissions of CO2 and other greenhouse gas emissions including methane (CH4), nitrous oxide (N2O), and Hydroflurocarbons (HFC) emissions. Other potential critical pollutants may include nitrogen oxide (NOx), particulate matter (PM), sulfur dioxide (SOx), and volatile organic compounds (VOCs).
Attachment #5: “Replace” Option - CO2 and GHG Emissions Reductions highlights the projected CO2 emissions savings for the new bridge. This Benefit Cost Analysis takes into consideration that each auto emits 5.1 metric tons of CO2 emissions per year and 0.916 pounds of CO2 emissions per mile, based upon the U.S. Environmental
Protection Agency’s calculation of CO2 emissions for passenger cars per year retrieved at http://www.epa.gov/cleanenergy/energy-resources/refs.html. Passenger vehicles are defined as 2-axle 4-tire vehicles, including passenger cars, vans, pickup trucks, and sport/utility vehicles. This analysis is based on the assumption of single riders per auto and 75% of rides to/from the stations are with autos rather than other sources of public transportation. This analysis is also based on recommended monetized values of emissions as outlined in U.S. DOT’s TIGER Benefit-Cost Analysis (BCA) Resource Guide updated 2/1/2012, retrieved at http://www.dot.gov/tiger/docs/tiger-12_bca- resourceGuide.pdf. This is based on the estimated distance of 6.7 miles between the West Gloucester station and the Rockport station (see the earlier map in the Increased Travel Time for Commuters section of the “no replace” option).
Attachment #5 also highlights the projected other greenhouse gas (GHG) emissions savings for the new bridge. These GHG quantities are based on the U.S. Environmental Protection Agency’s Document EPA420-F-11-041, Greenhouse Gas Emissions from a Typical Passenger Vehicle, retrieved at http://www.epa.gov/otaq/climate/documents/420f11041.pdf. According to the U.S. Environmental Protection Agency, automobiles produce other greenhouse gases (GHG) in addition to carbon dioxide, namely methane (CH4) and nitrous oxide (N2O) from the tailpipe, as well as Hydroflurocarbons (HFC) emissions from leaking air conditioners.
US EPA states that on average, CH4, N2O, and HFC emissions represent roughly 1 - 5 percent of the GHG emissions from passenger vehicles, while CO2 emissions account for 95-99 percent, accounting for the global warming potential of each green-house gas.
To simplify this Cost Benefit Analysis, it is assumed that CH4, N2O, and HFCs account for 1 percent of emissions, making the CO2 estimates the true indicator of emission reduction savings.
Benefits to the Tourism and Tax Revenue Related to Commuter Access to the North Shore / Essex County Communities Based on data from the North of Boston Convention and Visitors Bureau and the Massachusetts Office of Travel and Tourism, and MBTA projections on impact, the “replace” option offers distinct economic benefits with regard to continued tourism and tax revenue. Attachment #6: “Replace” Option – Benefits to Retained North Shore/Essex County Tourism and Tax Revenue details the cost benefits of retaining and sustaining the North of Boston communities tourism and tax revenues through a 30- year duration. The table below summarizes these cost benefits:
Benefits to Retaining North Shore/Essex County Tourism and Tax Revenue North Shore / Essex County $35,000,000 Tourism Revenue North Shore / Essex County $850,000 Tax Revenue Total Retained Revenue per $35,850,000 Year Total Cost Benefit over 30 $1,519,302,952 years 3% Discount $1,473,723,864 7% Discount $1,412,951,746
Economic Development in the Gloucester-Rockport Area through Private Investment It is important to underscore the importance of economic development through the new drawbridge. A safer and more attractive project area accessible by a continued MBTA commuter rail service will improve the retailing environment, create opportunities for higher taxable, higher density housing, and provide a more attractive environment to office and service industries to create quality jobs in the Rockport-Gloucester area. In addition to the immediate project area, this replacement project recognizes the potential community spillover effect that can occur when the most unattractive and unsafe part of the community is dramatically transformed. Because the economy of the area is driven largely by commuters and working families, the quality and attractiveness of the area will have a direct correlation to its competitiveness in the overall marketplace. This is true particularly as the Gloucester – Rockport region looks to attract new and expanding jobs and recreation to the community. This benefit, although qualitative in nature, is very important to the communities impacted by the new drawbridge and the continuation of the MBTA commuter rail service. ATTACHMENT #1 BENEFIT COST RATIO ANALYSIS DISCOUNT SUMMARY
7% Discount Rate 3% Discount Rate BENEFITS Millions of 2012$ BENEFITS Millions of 2012$ Travel Time Savings $38.7 Travel Time Savings $40.3 Saved Revenue for Maintained Ridership $5.0 Saved Revenue for Maintained Ridership $5.2 Layover Facility Construction Savings $12.0 Layover Facility Construction Savings $12.5 Retained Tourism and Tax Revenue $1,413.0 Retained Tourism and Tax Revenue $1,473.7
CO2 Emissions Reduction $0.7 CO2 Emissions Reduction $0.7 TOTAL BENEFITS $1,469.3 TOTAL BENEFITS $1,532.4 PV of Total Benefits $581.1 PV of Total Benefits $976.9
COSTS COSTS Operations & Maintenance Costs $17.6 Operations & Maintenance Costs $17.6 Capital Costs $41.9 Capital Costs $41.9 TOTAL COSTS $59.5 TOTAL COSTS $59.5 PV of Total Costs $46.5 PV of Total Costs $52.0
Net Present Value (NPV) $534.7 Net Present Value (NPV) $924.9 Benefit‐Cost Ratio (BCR) 12.5 Benefit‐Cost Ratio (BCR) 18.8
DISCOUNT SUMMARY SHEET ATTACHMENT #1 BENEFIT COST RATIO ANALYSIS
7% DISCOUNT CALCULATION SHEET Costs Benefits Present Value
Net Saved Revenue Construction Net Operations Travel Time for Maintained Layover Facility Retained Tourism Year Costs & Maint. Cost Total Costs Savings Ridership Savings Emissions1 and Tax Revenue Total Benefits Total Costs PV Total Benefits PV NPV Totals $41,900,000 $17,611,280 $59,511,280 $38,664,969 $4,957,047 $11,997,000 $682,121 $1,412,951,746 $1,469,252,882 $46,456,014 $581,123,783 $534,667,769 2012 $17,807,500 $275,100 $18,082,600 $548,076 $70,266 $5,998,500 $6,855 $33,340,500 $39,964,197 $18,082,600 $39,964,197 $21,881,597 2013 $17,807,500 $187,068 $17,994,568 $1,106,412 $141,848 $5,998,500 $14,086 $34,007,310 $41,268,155 $16,817,353 $38,568,369 $21,751,016 2014 $6,285,000 $187,068 $6,472,068 $1,116,768 $143,175 $0 $14,529 $34,687,456 $35,961,929 $5,652,955 $31,410,541 $25,757,586 2015 $0 $457,800 $457,800 $1,127,221 $144,515 $0 $14,980 $35,381,205 $36,667,922 $373,701 $29,931,947 $29,558,245 2016 $0 $466,956 $466,956 $1,137,772 $145,868 $0 $15,438 $36,088,829 $37,387,907 $356,238 $28,523,055 $28,166,817 2017 $0 $476,295 $476,295 $1,148,421 $147,233 $0 $15,903 $36,810,606 $38,122,164 $339,592 $27,180,576 $26,840,984 2018 $0 $485,821 $485,821 $1,159,170 $148,612 $0 $16,375 $37,546,818 $38,870,975 $323,723 $25,901,372 $25,577,649 2019 $0 $495,537 $495,537 $1,170,020 $150,003 $0 $16,855 $38,297,755 $39,634,633 $308,596 $24,682,457 $24,373,861 2020 $0 $505,448 $505,448 $1,180,972 $151,407 $0 $17,343 $39,063,710 $40,413,431 $294,175 $23,520,985 $23,226,809 2021 $0 $515,557 $515,557 $1,192,026 $152,824 $0 $17,971 $39,844,984 $41,207,804 $280,429 $22,414,315 $22,133,886 2022 $0 $525,868 $525,868 $1,203,183 $154,254 $0 $18,542 $40,641,883 $42,017,863 $267,325 $21,359,751 $21,092,426 2023 $0 $536,386 $536,386 $1,214,445 $155,698 $0 $19,190 $41,454,721 $42,844,054 $254,833 $20,354,902 $20,100,069 2024 $0 $547,113 $547,113 $1,225,812 $157,155 $0 $19,781 $42,283,816 $43,686,564 $242,925 $19,397,357 $19,154,432 2025 $0 $558,056 $558,056 $1,237,286 $158,626 $0 $20,450 $43,129,492 $44,545,853 $231,573 $18,484,945 $18,253,372 2026 $0 $569,217 $569,217 $1,248,867 $160,111 $0 $21,059 $43,992,082 $45,422,119 $220,752 $17,615,481 $17,394,729 2027 $0 $580,601 $580,601 $1,260,556 $161,610 $0 $21,749 $44,871,923 $46,315,838 $210,437 $16,786,991 $16,576,555 2028 $0 $592,213 $592,213 $1,272,355 $163,122 $0 $22,379 $45,769,362 $47,227,218 $200,603 $15,997,493 $15,796,890 2029 $0 $604,057 $604,057 $1,284,264 $164,649 $0 $23,019 $46,684,749 $48,156,681 $191,229 $15,245,172 $15,053,943 2030 $0 $616,139 $616,139 $1,296,285 $166,190 $0 $23,741 $47,618,444 $49,104,660 $182,293 $14,528,297 $14,346,004 2031 $0 $628,461 $628,461 $1,308,418 $167,746 $0 $24,401 $48,570,813 $50,071,378 $173,775 $13,845,153 $13,671,378 2032 $0 $641,031 $641,031 $1,320,665 $169,316 $0 $25,146 $49,542,229 $51,057,356 $165,654 $13,194,191 $13,028,536 2033 $0 $653,851 $653,851 $1,333,026 $170,901 $0 $25,828 $50,533,074 $52,062,829 $157,914 $12,573,854 $12,415,941 2034 $0 $666,928 $666,928 $1,345,503 $172,500 $0 $26,596 $51,543,735 $53,088,334 $150,534 $11,982,736 $11,832,202 2035 $0 $680,267 $680,267 $1,358,097 $174,115 $0 $27,300 $52,574,610 $54,134,122 $143,500 $11,419,424 $11,275,924 2036 $0 $693,872 $693,872 $1,370,809 $175,745 $0 $28,091 $53,626,102 $55,200,747 $136,795 $10,882,641 $10,745,846 2037 $0 $707,749 $707,749 $1,383,640 $177,390 $0 $28,817 $54,698,624 $56,288,471 $130,402 $10,371,104 $10,240,702 2038 $0 $721,904 $721,904 $1,396,591 $179,050 $0 $29,555 $55,792,597 $57,397,792 $124,309 $9,883,641 $9,759,332 2039 $0 $736,343 $736,343 $1,409,663 $180,726 $0 $30,383 $56,908,449 $58,529,220 $118,500 $9,419,129 $9,300,629 2040 $0 $751,069 $751,069 $1,422,857 $182,418 $0 $31,144 $58,046,618 $59,683,036 $112,963 $8,976,461 $8,863,498 2041 $0 $766,091 $766,091 $1,436,175 $184,125 $0 $31,916 $59,207,550 $60,859,766 $107,684 $8,554,620 $8,446,936 2042 $0 $781,413 $781,413 $1,449,618 $185,848 $0 $32,701 $60,391,701 $62,059,868 $102,652 $8,152,626 $8,049,974
Notes
1 CO2 emissions calculations are based on the suggested technical methodologies for calculating the Social Cost of Carbon as recommended by the U.S. DOT’s TIGER Benefit‐Cost Analysis (BCA) Resource Guide updated 2/1/2012. These US DOT suggestions are supported by the Interagency Working Group on Social Cost of Carbon, United States Government, Technical Support Document: Social Cost of carbon for Regulatory Impact Analysis Under Executive
Order 12866 (February 2010). As recommended, the CO2 calculations use a 3% discount. A 7% discount applies to all other benefits presented herein.
7% DISCOUNT CALCULATION SHEET ATTACHMENT #1 BENEFIT COST RATIO ANALYSIS
3% DISCOUNT CALCULATION SHEET Costs Benefits Present Value
Net Saved Revenue Construction Net Operations Travel Time for Maintained Layover Facility Retained Tourism Year Costs & Maint. Cost Total Costs Savings Ridership Savings Emissions and Tax Revenue Total Benefits Total Costs PV Total Benefits PV NPV Totals $41,900,000 $17,611,280 $59,511,280 $40,327,978 $5,170,254 $12,513,000 $682,121 $1,473,723,864 $1,532,417,216 $51,968,611 $976,908,077 $924,939,466 2012 $17,807,500 $275,100 $18,082,600 $571,649 $73,288 $6,256,500 $6,855 $34,774,500 $41,682,793 $18,082,600 $41,682,793 $23,600,193 2013 $17,807,500 $187,068 $17,994,568 $1,154,000 $147,949 $6,256,500 $14,086 $35,469,990 $43,042,524 $17,470,454 $41,788,858 $24,318,404 2014 $6,285,000 $187,068 $6,472,068 $1,164,801 $149,333 $0 $14,529 $36,179,390 $37,508,053 $6,100,545 $35,354,938 $29,254,393 2015 $0 $457,800 $457,800 $1,175,704 $150,731 $0 $14,980 $36,902,978 $38,244,392 $418,952 $34,999,037 $34,580,085 2016 $0 $466,956 $466,956 $1,186,708 $152,142 $0 $15,438 $37,641,037 $38,995,325 $414,884 $34,646,841 $34,231,957 2017 $0 $476,295 $476,295 $1,197,816 $153,566 $0 $15,903 $38,393,858 $39,761,143 $410,856 $34,298,311 $33,887,454 2018 $0 $485,821 $485,821 $1,209,027 $155,003 $0 $16,375 $39,161,735 $40,542,141 $406,867 $33,953,405 $33,546,537 2019 $0 $495,537 $495,537 $1,220,344 $156,454 $0 $16,855 $39,944,970 $41,338,623 $402,917 $33,612,083 $33,209,166 2020 $0 $505,448 $505,448 $1,231,766 $157,919 $0 $17,343 $40,743,869 $42,150,897 $399,005 $33,274,307 $32,875,302 2021 $0 $515,557 $515,557 $1,243,295 $159,397 $0 $17,971 $41,558,747 $42,979,410 $395,132 $32,940,139 $32,545,007 2022 $0 $525,868 $525,868 $1,254,933 $160,889 $0 $18,542 $42,389,921 $43,824,285 $391,295 $32,609,384 $32,218,089 2023 $0 $536,386 $536,386 $1,266,679 $162,395 $0 $19,190 $43,237,720 $44,685,984 $387,496 $32,282,106 $31,894,609 2024 $0 $547,113 $547,113 $1,278,535 $163,915 $0 $19,781 $44,102,474 $45,564,705 $383,734 $31,958,167 $31,574,433 2025 $0 $558,056 $558,056 $1,290,502 $165,449 $0 $20,450 $44,984,524 $46,460,924 $380,009 $31,637,629 $31,257,620 2026 $0 $569,217 $569,217 $1,302,581 $166,998 $0 $21,059 $45,884,214 $47,374,852 $376,319 $31,320,358 $30,944,039 2027 $0 $580,601 $580,601 $1,314,773 $168,561 $0 $21,749 $46,801,899 $48,306,982 $372,666 $31,006,413 $30,633,748 2028 $0 $592,213 $592,213 $1,327,080 $170,138 $0 $22,379 $47,737,937 $49,257,534 $369,048 $30,695,666 $30,326,619 2029 $0 $604,057 $604,057 $1,339,501 $171,731 $0 $23,019 $48,692,695 $50,226,946 $365,465 $30,388,128 $30,022,664 2030 $0 $616,139 $616,139 $1,352,039 $173,338 $0 $23,741 $49,666,549 $51,215,667 $361,916 $30,083,807 $29,721,890 2031 $0 $628,461 $628,461 $1,364,694 $174,961 $0 $24,401 $50,659,880 $52,223,936 $358,403 $29,782,581 $29,424,178 2032 $0 $641,031 $641,031 $1,377,467 $176,598 $0 $25,146 $51,673,078 $53,252,290 $354,923 $29,484,502 $29,129,579 2033 $0 $653,851 $653,851 $1,390,361 $178,251 $0 $25,828 $52,706,539 $54,300,979 $351,477 $29,189,452 $28,837,975 2034 $0 $666,928 $666,928 $1,403,374 $179,920 $0 $26,596 $53,760,670 $55,370,560 $348,065 $28,897,480 $28,549,415 2035 $0 $680,267 $680,267 $1,416,510 $181,604 $0 $27,300 $54,835,883 $56,461,297 $344,686 $28,608,473 $28,263,788 2036 $0 $693,872 $693,872 $1,429,768 $183,304 $0 $28,091 $55,932,601 $57,573,764 $341,339 $28,322,477 $27,981,138 2037 $0 $707,749 $707,749 $1,443,151 $185,019 $0 $28,817 $57,051,253 $58,708,241 $338,025 $28,039,383 $27,701,358 2038 $0 $721,904 $721,904 $1,456,659 $186,751 $0 $29,555 $58,192,278 $59,865,243 $334,743 $27,759,198 $27,424,454 2039 $0 $736,343 $736,343 $1,470,293 $188,499 $0 $30,383 $59,356,124 $61,045,299 $331,493 $27,481,925 $27,150,432 2040 $0 $751,069 $751,069 $1,484,055 $190,263 $0 $31,144 $60,543,246 $62,248,709 $328,275 $27,207,463 $26,879,188 2041 $0 $766,091 $766,091 $1,497,946 $192,044 $0 $31,916 $61,754,111 $63,476,018 $325,088 $26,935,817 $26,610,729 2042 $0 $781,413 $781,413 $1,511,967 $193,842 $0 $32,701 $62,989,193 $64,727,703 $321,932 $26,666,956 $26,345,025
3% DISCOUNT CALCULATION SHEET Attachment #2
Attachment # 2 "No Replace" Option Layover Facility Costs
Operation and 1 Year Construction Costs Maintenance Costs Total 2012 $6,450,000 $0 $6,450,000 2013 $6,450,000 $550,000 $7,000,000 2014 $0 $1,100,000 $1,100,000 2015 $0 $1,122,000 $1,122,000 2016 $0 $1,144,440 $1,144,440 2017 $0 $1,167,329 $1,167,329 2018 $0 $1,190,675 $1,190,675 2019 $0 $1,214,489 $1,214,489 2020 $0 $1,238,779 $1,238,779 2021 $0 $1,263,554 $1,263,554 2022 $0 $1,288,825 $1,288,825 2023 $0 $1,314,602 $1,314,602 2024 $0 $1,340,894 $1,340,894 2025 $0 $1,367,712 $1,367,712 2026 $0 $1,395,066 $1,395,066 2027 $0 $1,422,967 $1,422,967 2028 $0 $1,451,427 $1,451,427 2029 $0 $1,480,455 $1,480,455 2030 $0 $1,510,064 $1,510,064 2031 $0 $1,540,266 $1,540,266 2032 $0 $1,571,071 $1,571,071 2033 $0 $1,602,492 $1,602,492 2034 $0 $1,634,542 $1,634,542 2035 $0 $1,667,233 $1,667,233 2036 $0 $1,700,578 $1,700,578 2037 $0 $1,734,589 $1,734,589 2038 $0 $1,769,281 $1,769,281 2039 $0 $1,804,667 $1,804,667 2040 $0 $1,840,760 $1,840,760 2041 $0 $1,877,575 $1,877,575 2042 $0 $1,915,127 $1,915,127 TOTAL $12,900,000 $43,221,458 $56,121,458
Notes 1 Land acquisition and facility construction is anticiapted to last 1.5 years. For this analysis, costs have been splitted between the remainded of 2012 and 2013. ATTACHMENT #3
Attachment # 3 "No Replace" Option Lost Fare and Ridership
Total Ridership Lost from West Gloucester to Rockport Stations Lost Revenue 1 2 Year (per year) per Ride Total Lost Revenue 2012 151,110 $0.50 $75,555.00 2013 305,049 $0.50 $152,524.39 2014 307,904 $0.50 $153,952.02 2015 310,786 $0.50 $155,393.01 2016 313,695 $0.50 $156,847.49 2017 316,631 $0.50 $158,315.58 2018 319,595 $0.50 $159,797.41 2019 322,586 $0.50 $161,293.12 2020 325,606 $0.50 $162,802.82 2021 328,653 $0.50 $164,326.66 2022 331,730 $0.50 $165,864.75 2023 334,834 $0.50 $167,417.25 2024 337,969 $0.50 $168,984.27 2025 341,132 $0.50 $170,565.97 2026 344,325 $0.50 $172,162.46 2027 347,548 $0.50 $173,773.90 2028 350,801 $0.50 $175,400.43 2029 354,084 $0.50 $177,042.18 2030 357,399 $0.50 $178,699.29 2031 360,744 $0.50 $180,371.92 2032 364,120 $0.50 $182,060.20 2033 367,529 $0.50 $183,764.28 2034 370,969 $0.50 $185,484.31 2035 374,441 $0.50 $187,220.45 2036 377,946 $0.50 $188,972.83 2037 381,483 $0.50 $190,741.62 2038 385,054 $0.50 $192,526.96 2039 388,658 $0.50 $194,329.01 2040 392,296 $0.50 $196,147.93 2041 395,968 $0.50 $197,983.87 2042 399,674 $0.50 $199,837.00 TOTAL 10,660,317 $5,330,158.35
Notes
1 Based on MBTA projections, ridership is projected to grow 0.936% each year. 2012 projected lost revenue begins mid-year.
2 Assumes fare increases proportional to the current fare distribution among the current fare zones. Attachment #4
Attachment # 4 "Replace" Option Travel Time Savings
Retained Ridership from West Gloucester to All Purposes Intercity Rockport Stations Travel Time Saved per Total Travel Time Saved Travel Value (per person-Yearly Travel Time Value 1 2 2 Year (per year) Rider (in minutes) (in minutes) hour) (non-discounted) 2012 151,110 13 1,964,430 $18.00 $589,329.00 2013 305,049 13 3,965,634 $18.00 $1,189,690.24 2014 307,904 13 4,002,752 $18.00 $1,200,825.74 2015 310,786 13 4,040,218 $18.00 $1,212,065.47 2016 313,695 13 4,078,035 $18.00 $1,223,410.40 2017 316,631 13 4,116,205 $18.00 $1,234,861.52 2018 319,595 13 4,154,733 $18.00 $1,246,419.83 2019 322,586 13 4,193,621 $18.00 $1,258,086.32 2020 325,606 13 4,232,873 $18.00 $1,269,862.00 2021 328,653 13 4,272,493 $18.00 $1,281,747.91 2022 331,730 13 4,312,484 $18.00 $1,293,745.07 2023 334,834 13 4,352,848 $18.00 $1,305,854.53 2024 337,969 13 4,393,591 $18.00 $1,318,077.32 2025 341,132 13 4,434,715 $18.00 $1,330,414.53 2026 344,325 13 4,476,224 $18.00 $1,342,867.21 2027 347,548 13 4,518,121 $18.00 $1,355,436.45 2028 350,801 13 4,560,411 $18.00 $1,368,123.33 2029 354,084 13 4,603,097 $18.00 $1,380,928.97 2030 357,399 13 4,646,182 $18.00 $1,393,854.46 2031 360,744 13 4,689,670 $18.00 $1,406,900.94 2032 364,120 13 4,733,565 $18.00 $1,420,069.53 2033 367,529 13 4,777,871 $18.00 $1,433,361.38 2034 370,969 13 4,822,592 $18.00 $1,446,777.64 2035 374,441 13 4,867,732 $18.00 $1,460,319.48 2036 377,946 13 4,913,294 $18.00 $1,473,988.07 2037 381,483 13 4,959,282 $18.00 $1,487,784.60 2038 385,054 13 5,005,701 $18.00 $1,501,710.27 2039 388,658 13 5,052,554 $18.00 $1,515,766.27 2040 392,296 13 5,099,846 $18.00 $1,529,953.85 2041 395,968 13 5,147,581 $18.00 $1,544,274.21 2042 399,674 13 5,195,762 $18.00 $1,558,728.62 TOTAL 10,660,317 138,584,117 $41,575,235.17
Notes
1 Based on MBTA projections, ridership is projected to grow 0.936% each year. 2012 projected saved travel time begins mid-year.
2 Travel Time saved per Rider is the 7 minutes lost in the “no replace” option plus the 4 minutes saves with the 20 mph commuter rail trains over the bridge.
3 Based on recommended hourly values of travel time savings as outlined in U.S. DOT’s TIGER Benefit-Cost Analysis (BCA) Resource Guide updated 2/1/2012, retrieved at http://www.dot.gov/tiger/docs/tiger-12_bca-resourceGuide.pdf. The recommended All Purposes, Surface Mode, Intercity Travel Value of $18.00 per person-hour was used in the calculation. ATTACHMENT #5
Attachment # 5: "Replace" Option - CO2 and GHG Emissions Reductions
CO2 Emissions CO2 Emissions GHG Emissions Monetized Value Value of CO2 Total Ridership # of trips diverted # of trips Trips - Assuming Total # of Miles Diverted Use/Reduction per day Use/Reduction per year Use/Reduction CO2 emissions Emissions 1 2 3 4 5 6 7 8 Year Projected from auto diverted per day Round Trip per day (metric tons) (metric tons) (metric tons) (per metric ton) (Undiscounted) 2012 151,110 113,333 311 155 2,080 0.864 315 3.155 $22.40 $7,067.06 2013 305,049 228,787 627 313 4,200 1.745 637 6.369 $22.80 $14,521.16 2014 307,904 230,928 633 316 4,239 1.761 643 6.429 $23.30 $14,978.51 2015 310,786 233,090 639 319 4,279 1.778 649 6.489 $23.80 $15,443.14 2016 313,695 235,271 645 322 4,319 1.794 655 6.549 $24.30 $15,915.16 2017 316,631 237,473 651 325 4,359 1.811 661 6.611 $24.80 $16,394.67 2018 319,595 239,696 657 328 4,400 1.828 667 6.673 $25.30 $16,881.75 2019 322,586 241,940 663 331 4,441 1.845 674 6.735 $25.80 $17,376.52 2020 325,606 244,204 669 335 4,483 1.863 680 6.798 $26.30 $17,879.07 2021 328,653 246,490 675 338 4,525 1.880 686 6.862 $27.00 $18,526.74 2022 331,730 248,797 682 341 4,567 1.898 693 6.926 $27.60 $19,115.71 2023 334,834 251,126 688 344 4,610 1.915 699 6.991 $28.30 $19,783.99 2024 337,969 253,476 694 347 4,653 1.933 706 7.056 $28.90 $20,392.54 2025 341,132 255,849 701 350 4,696 1.951 712 7.122 $29.60 $21,081.98 2026 344,325 258,244 708 354 4,740 1.970 719 7.189 $30.20 $21,710.64 2027 347,548 260,661 714 357 4,785 1.988 726 7.256 $30.90 $22,421.79 2028 350,801 263,101 721 360 4,830 2.007 732 7.324 $31.50 $23,071.11 2029 354,084 265,563 728 364 4,875 2.025 739 7.393 $32.10 $23,730.62 2030 357,399 268,049 734 367 4,920 2.044 746 7.462 $32.80 $24,475.07 2031 360,744 270,558 741 371 4,966 2.063 753 7.532 $33.40 $25,156.06 2032 364,120 273,090 748 374 5,013 2.083 760 7.602 $34.10 $25,923.68 2033 367,529 275,646 755 378 5,060 2.102 767 7.673 $34.70 $26,626.73 2034 370,969 278,226 762 381 5,107 2.122 775 7.745 $35.40 $27,418.12 2035 374,441 280,831 769 385 5,155 2.142 782 7.818 $36.00 $28,143.82 2036 377,946 283,459 777 388 5,203 2.162 789 7.891 $36.70 $28,959.61 2037 381,483 286,112 784 392 5,252 2.182 796 7.965 $37.30 $29,708.56 2038 385,054 288,790 791 396 5,301 2.203 804 8.039 $37.90 $30,468.99 2039 388,658 291,494 799 399 5,351 2.223 811 8.115 $38.60 $31,322.20 2040 392,296 294,222 806 403 5,401 2.244 819 8.191 $39.20 $32,106.80 2041 395,968 296,976 814 407 5,451 2.265 827 8.267 $39.80 $32,903.35 2042 399,674 299,756 821 411 5,502 2.286 834 8.345 $40.40 $33,712.00 TOTAL 10,660,317 1,599,048 4381 2,190 146,762 60.978 22,257 222.570 $703,217.18
Notes Assumptions 1 Number of trips diverted to/from automobile travel due Percent of Rides To/From Auto 75% 2 Diverted trips converted to a daily number. Yearly totals Riders per Auto 1 divided by 365 days 3 Conversion to round trips equals # of trips diverted divided by 2 Projected Ridership Increase per Year 0.936% 4 Each vehicle goes a distance of 6.7 miles each way daily = 13.4 miles Percent of CO2 emissions in GHG emissions7 99.000% per car daily.
5 Each vehicle emits 0.916 LBs of CO2 per mile, based on US EPA's Document # EPA420-F-00-013, Emission Facts: Average Annual Emissions and Fuel Consumption for Passenger Cars and Light Trucks , April 2000. For the conversion: 1 pound = 0.0004539237 metric tons. 6 Daily CO2 emissions times 365 days.
7 Greenhouse Gas (GHG) emissions make up 1%-5% of the total emmsions of a personal automobile, according to US EPA. Quantifiable benefits are negligible (1% estimate), but shown as per year quanties. 8 Metric ton per vehicle per year are based on the U.S. Government's Interagency Working Group on Social Cost of Carbon's Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, February 2010. ATTACHMENT #6
Attachment # 6 "Replace" Option Benefits to Retained North Shore/Essex County Tourism and Tax Revenue
Total Revenue Lost from North Shore / Essex County Regions 1 Year (per year) 2012 35,850,000 2013 36,567,000 2014 37,298,340 2015 38,044,307 2016 38,805,193 2017 39,581,297 2018 40,372,923 2019 41,180,381 2020 42,003,989 2021 42,844,069 2022 43,700,950 2023 44,574,969 2024 45,466,468 2025 46,375,798 2026 47,303,314 2027 48,249,380 2028 49,214,368 2029 50,198,655 2030 51,202,628 2031 52,226,681 2032 53,271,214 2033 54,336,638 2034 55,423,371 2035 56,531,839 2036 57,662,475 2037 58,815,725 2038 59,992,039 2039 61,191,880 2040 62,415,718 2041 63,664,032 2042 64,937,313 TOTAL 1,519,302,952
Notes 1 Based on data from the North of Boston Convention and Visitors Bureau and the Massachusetts Office of Travel and Tourism, and MBTA projections on community impact. OMB Circular A-94
Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs
10 CIRCULAR A-94
GUIDELINES AND DISCOUNT RATES
FOR BENEFIT-COST ANALYSIS OF FEDERAL PROGRAMS CIRCULAR NO. A-94 (Transmittal Memo No.64)
MEMORANDUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs
Table of Contents Page
1. Purpose ...... 1 2. Rescission ...... 2 3. Authority ...... 2 4. Scope ...... 2 5. General Principles ...... 3 a. Net Present Value and Related Outcome Measures b. Cost-Effectiveness Analysis c. Elements of Benefit-Cost or Cost-Effectiveness Analysis 6. Identifying and Measuring Benefits and Costs ...... 5 a. Identifying Benefits and Costs b. Measuring Benefits and Costs 7. Treatment of Inflation ...... 6 a. Real or Nominal Values b. Recommended Inflation Assumption 8. Discount Rate Policy ...... 7 a. Real versus Nominal Discount Rates b. Public Investment and Regulatory Analyses c. Cost-Effectiveness, Lease-Purchase, Internal Government Investment, and Asset Sale Analyses 9. Treatment of Uncertainty ...... 10 a. Characterizing Uncertainty b. Expected Values c. Sensitivity Analysis d. Other Adjustments for Uncertainty 10. Incidence and Distributional Effects ...... 11 a. Alternative Classifications b. Economic Incidence 11. Special Guidance for Public Investment Analysis ...... 12 a. Analysis of Excess Burdens b. Exceptions 12. Special Guidance for Regulatory Impact Analysis ...... 12 13. Special Guidance for Lease-Purchase Analysis ...... 12 a. Coverage b. Required Justification for Leases c. Analytical Requirements and Definitions 14. Related Guidance ...... 16 15. Implementation ...... 16 16. Effective Date ...... 16 17. Interpretation ...... 16
Appendix A: Definitions of Terms ...... 17 Appendix B: Additional Guidance for Discounting ...... 20 Appendix C: Discount Rates for Cost-Effectiveness, Lease- Purchase, and Related Analyses ...... 22
1. Purpose. The goal of this Circular is to promote efficient resource allocation through well-informed decision-making by the Federal Government. It provides general guidance for conducting benefit-cost and cost-effectiveness -2- analyses. It also provides specific guidance on the discount rates to be used in evaluating Federal programs whose benefits and costs are distributed over time. The general guidance will serve as a checklist of whether an agency has considered and properly dealt with all the elements for sound benefit-cost and cost-effectiveness analyses.
2. Rescission. This Circular replaces and rescinds Office of Management and Budget (OMB) Circular No. A-94, "Discount Rates to Be Used in Evaluating Time-Distributed Costs and Benefits," dated March 27, 1972, and Circular No. A-104, "Evaluating Leases of Capital Assets," dated June 1, 1986, which has been rescinded. Lease-purchase analysis is only appropriate after a decision has been made to acquire the services of an asset. Guidance for lease- purchase analysis is provided in Section 8.c.(2) and Section 13.
3. Authority. This Circular is issued under the authority of 31 U.S.C. Section 1111 and the Budget and Accounting Act of 1921, as amended.
4. Scope. This Circular does not supersede agency practices which are prescribed by or pursuant to law, Executive Order, or other relevant circulars. The Circular's guidelines are suggested for use in the internal planning of Executive Branch agencies. The guidelines must be followed in all analyses submitted to OMB in support of legislative and budget-programs in compliance with OMB Circulars No. A-11, "Preparation and Submission of Annual Budget Estimates," and No. A-19, "Legislative Coordination and Clearance." These guidelines must also be followed in providing estimates submitted to OMB in compliance with Executive Order No. 12291, "Federal Regulation," and the President's April 29, 1992 memorandum requiring benefit-cost analysis for certain legislative proposals. a. Aside from the exceptions listed below, the guidelines in this Circular apply to any analysis used to support Government decisions to initiate, renew, or expand programs or projects which would result in a series of measurable benefits or costs extending for three or more years into the future. The Circular applies specifically to:
(1) Benefit-cost or cost-effectiveness analysis of Federal programs or policies.
(2) Regulatory impact analysis.
(3) Analysis of decisions whether to lease or purchase.
(4) Asset valuation and sale analysis. b. Specifically exempted from the scope of this Circular are decisions concerning:
(1) Water resource projects (guidance for which is the approved Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies). -3-
(2) The acquisition of commercial-type services by Government or contractor operation (guidance for which is OMB Circular No. A-76).
(3) Federal energy management programs (guidance for which can be found in the Federal Register of January 25, 1990, and November 20, 1990). c. This Circular applies to all agencies of the Executive Branch of the Federal Government. It does not apply to the Government of the District of Columbia or to non-Federal recipients of loans, contracts or grants. Recipients are encouraged, however, to follow the guidelines provided here when preparing analyses in support of Federal activities. d. For small projects which share similar characteristics, agencies are encouraged to conduct generic studies and to avoid duplication of effort in carrying out economic analysis.
5. General Principles. Benefit-cost analysis is recommended as the technique to use in a formal economic analysis of government programs or projects. Cost-effectiveness analysis is a less comprehensive technique, but it can be appropriate when the benefits from competing alternatives are the same or where a policy decision has been made that the benefits must be provided. (Appendix A provides a glossary of technical terms used in this Circular; technical terms are italicized when they first appear.) a. Net Present Value and Related Outcome Measures,. The standard criterion for deciding whether a government program can be justified on economic principles is net present value -- the discounted monetized value of expected net benefits (i.e., benefits minus costs). Net present value is computed by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. Discounting benefits and costs transforms gains and losses occurring in different time periods to a common unit of measurement. Programs with positive net present value increase social resources and are generally preferred. Programs with negative net present value should generally be avoided. (Section 8 considers discounting issues in more detail.)
Although net present value is not always computable (and it does not usually reflect effects on income distribution), efforts to measure it can produce useful insights even when the monetary values of some benefits or costs cannot be determined. In these cases:
(1) A comprehensive enumeration of the different types of benefits and costs, monetized or not, can be helpful in identifying the full range of program effects.
(2) Quantifying benefits and costs is worthwhile, even when it is not feasible to assign monetary values; physical measurements may be possible and useful.
Other summary effectiveness measures can provide useful supplementary information to net present value, and analysts are encouraged to report them also. Examples include the number of injuries prevented per dollar -4-
of cost (both measured in present value terms) or a project's internal rate of return. b. Cost-Effectiveness Analysis. A program is cost-effective if, on the basis of life cycle cost analysis of competing alternatives, it is determined to have the lowest costs expressed in present value terms for a given amount of benefits. Cost-effectiveness analysis is appropriate whenever it is unnecessary or impractical to consider the dollar value of the benefits provided by the alternatives under consideration. This is the case whenever (i) each alternative has the same annual benefits expressed in monetary terms; or (ii) each alternative has the same annual affects, but dollar values cannot be assigned to their benefits. Analysis of alternative defense systems often falls in this category.
Cost-effectiveness analysis can also be used to compare programs with identical costs but differing benefits. In this case, the decision criterion is the discounted present value of benefits. The alternative program with the largest benefits would normally be favored. c. Elements of Benefit-Cost or Cost-Effectiveness Analysis.
(1) Policy Rationale. The rationale for the Government program being examined should be clearly stated in the analysis. Programs may be justified on efficiency grounds where they address market failure, such as public goods and externalities. They may also be justified where they improve the efficiency of the Government's internal operations, such as cost-saving investments.
(2) Explicit Assumptions. Analyses should be explicit about the underlying assumptions used to arrive at estimates of future benefits and costs. In the case of public health programs, for example, it may be necessary to make assumptions about the number of future beneficiaries, the intensity of service, and the rate of increase in medical prices. The analysis should include a statement of the assumptions, the rationale behind them, and a review of their strengths and weaknesses. Key data and results, such as year-by-year estimates of benefits and costs, should be reported to promote independent analysis and review.
(3) Evaluation of Alternatives. Analyses should also consider alternative means of achieving program objectives by examining different program scales, different methods of provision, and different degrees of government involvement. For example, in evaluating a decision to acquire a capital asset, the analysis should generally consider: (i) doing nothing; (ii) direct purchase; (iii) upgrading, renovating, sharing, or converting existing government property; or (iv) leasing or contracting for services.
(4) Verification. Retrospective studies to determine whether anticipated benefits and costs have been realized are potentially valuable. Such studies can be used to determine necessary corrections in existing programs, and to improve future estimates of benefits and costs in these programs or related ones. -5-
Agencies should have a plan for periodic, results-oriented evaluation of program effectiveness. They should also discuss the results of relevant evaluation studies when proposing reauthorizations or increased program funding.
6. Identifying and Measuring Benefits and Costs. Analyses should include comprehensive estimates of the expected benefits and costs to society based on established definitions and practices for program and policy evaluation. Social net benefits, and not the benefits and costs to the Federal Government, should be the basis for evaluating government programs or policies that have effects on private citizens or other levels of government. Social benefits and costs can differ from private benefits and costs as measured in the marketplace because of imperfections arising from: (i) external economies or diseconomies where actions by one party impose benefits or costs on other groups that are not compensated in the market place; (ii) monopoly power that distorts the relationship between marginal costs and market prices; and (iii) taxes or subsidies. a. Identifying Benefits and Costs. Both intangible and tangible benefits and costs should be recognized. The relevant cost concept is broader than private-sector production and compliance costs or government cash expenditures. Costs should reflect the opportunity cost of any resources used, measured by the return to those resources in their most productive application elsewhere. Below are some guidelines to consider when identifying benefits and costs.
(1) Incremental Benefits and Costs. Calculation of net present value should be based on incremental benefits and costs. Sunk costs and realized benefits should be ignored. Past experience is relevant only in helping to estimate what the value of future benefits and costs might be. Analyses should take particular care to identify the extent to which a policy such as a subsidy program promotes substitutes for activities of a similar nature that would occur without the policy. Either displaced activities should be explicitly recorded as costs or only incremental gains should be recorded as benefits of the policy.
(2) Interactive Effects. Possible interactions between the benefits and costs being analyzed and other government activities should be considered. For example, policies affecting agricultural output should reflect real economic values, as opposed to subsidized prices.
(3) International Effects. Analyses should focus on benefits and costs accruing to the citizens of the United States in determining net present value. Where programs or projects have effects outside the United States, these effects should be reported separately.
(4) Transfers. There are no economic gains from a pure transfer payment because the benefits to those who receive such a transfer are matched by the costs borne by those who pay for it. Therefore, transfers should be excluded from the calculation of net present value. Transfers that arise as a result of the program or project being analyzed should be identified as such, however, and their distributional effects discussed. It should also be recognized that -6-
a transfer program may have benefits that are less than the program's real economic costs due to inefficiencies that can arise in the program's delivery of benefits and financing. b. Measuring Benefits and Costs. The principle of willingness-to-pay provides an aggregate measure of what individuals are willing to forego to obtain a given benefit. Market prices provide an invaluable starting point for measuring willingness-to-pay, but prices sometimes do not adequately reflect the true value of a good to society. Externalities, monopoly power, and taxes or subsidies can distort market prices.
Taxes, for example, usually create an excess burden that represents a net loss to society. (The appropriate method for recognizing this excess burden in public investment analyses is discussed in Section 11.) In other cases, market prices do not exist for a relevant benefit or cost. When market prices are distorted or unavailable, other methods of valuing benefits may have to be employed. Measures derived from actual market behavior are preferred when they are available.
(1) Inframarginal Benefits and Costs. Consumers would generally be willing to pay more than the market price rather than go entirely without a good they consume. The economist's concept of consumer surplus measures the extra value consumers derive from their consumption compared with the value measured at market prices. When it can be determined, consumer surplus provides the best measure of the total benefit to society from a government program or project. Consumer surplus can sometimes be calculated by using econometric methods to estimate consumer demand.
(2) Indirect Measures of Benefits and Costs. Willingness-to-pay can sometimes be estimated indirectly through changes in land values, variations in wage rates, or other methods. Such methods are most reliable when they are based on actual market transactions. Measures should be consistent with basic economic principles and should be replicable.
(3) Multiplier Effects. Generally, analyses should treat resources as if they were likely to be fully employed. Employment or output multipliers that purport to measure the secondary effects of government expenditures on employment and output should not be included in measured social benefits or costs.
7. Treatment of Inflation. Future inflation is highly uncertain. Analysts should avoid having to make an assumption about the general rate of inflation whenever possible. a. Real or Nominal Values. Economic analyses are often most readily accomplished using real or constant-dollar values, i.e., by measuring benefits and costs in units of stable purchasing power. (Such estimates may reflect expected future changes in relative prices, however, where there is a reasonable basis for estimating such changes.) Where future benefits and costs are given in nominal terms, i.e., in terms of the future purchasing power of the dollar, the analysis should use these -7-
values rather than convert them to constant dollars as, for example, in the case of lease-purchase analysis.
Nominal and real values must not be combined in the same analysis. Logical consistency requires that analysis be conducted either in constant dollars or in terms of nominal values. This may require converting some nominal values to real values, or vice versa. b. Recommended Inflation Assumption. When a general inflation assumption is needed, the rate of increase in the Gross Domestic Product deflator from the Administration's economic assumptions for the period of the analysis is recommended. For projects or programs that extend beyond the six-year budget horizon, the inflation assumption can be extended by using the inflation rate for the sixth year of the budget forecast. The Administration's economic forecast is updated twice annually, at the time the budget is published in January or February and at the time of the Mid-Session Review of the Budget in July. Alternative inflation estimates, based on credible private sector forecasts, may be used for sensitivity analysis.
8. Discount Rate Policy. In order to compute net present value, it is necessary to discount future benefits and costs. This discounting reflects the time value of money. Benefits and costs are worth more if they are experienced sooner. All future benefits and costs, including nonmonetized benefits and costs, should be discounted. The higher the discount rate, the lower is the present value of future cash flows. For typical investments, with costs concentrated in early periods and benefits following in later periods, raising the discount rate tends to reduce the net present value. (Technical guidance on discounting and a table of discount factors are provided in Appendix B.) a. Real versus Nominal Discount Rates. The proper discount rate to use depends on whether the benefits and costs are measured in real or nominal terms.
(1) A real discount rate that has been adjusted to eliminate the effect of expected inflation should be used to discount constant-dollar or real benefits and costs. A real discount rate can be approximated by subtracting expected inflation from a nominal interest rate.
(2) A nominal discount rate that reflects expected inflation should be used to discount nominal benefits and costs. Market interest rates are nominal interest rates in this sense. b. Public Investment and Regulatory Analyses. The guidance in this section applies to benefit-cost analyses of public investments and regulatory programs that provide benefits and costs to the general public. Guidance related to cost-effectiveness analysis of internal planning decisions of the Federal Government is provided in Section 8.c.
In general, public investments and regulations displace both private investment and consumption. To account for this displacement and to promote efficient investment and regulatory policies, the following guidance should be observed. -8-
(1) Base-Case Analysis. Constant-dollar benefit-cost analyses of proposed investments and regulations should report net present value and other outcomes determined using a real discount rate of 7 percent. This rate approximates the marginal pretax rate of return on an average investment in the private sector in recent years. Significant changes in this rate will be reflected in future updates of this Circular.
(2) Other Discount Rates. Analyses should show the sensitivity of the discounted net present value and other outcomes to variations in the discount rate. The importance of these alternative calculations will depend on the specific economic characteristics of the program under analysis. For example, in analyzing a regulatory proposal whose main cost is to reduce business investment, net present value should also be calculated using a higher discount rate than 7 percent.
Analyses may include among the reported outcomes the internal rate of return implied by the stream of benefits and costs. The internal rate of return is the discount rate that sets the net present value of the program or project to zero. While the internal rate of return does not generally provide an acceptable decision criterion, it does provide useful information, particularly when budgets are constrained or there is uncertainty about the appropriate discount rate.
(3) Using the shadow price of capital to value benefits and costs is the analytically preferred means of capturing the effects of government projects on resource allocation in the private sector. To use this method accurately, the analyst must be able to compute how the benefits and costs of a program or project affect the allocation of private consumption and investment. OMB concurrence is required if this method is used in place of the base case discount rate. c. Cost-Effectiveness, Lease-Purchase, Internal Government Investment, and Asset Sales Analyses. The Treasury's borrowing rates should be used as discount rates in the following cases:
(1) Cost-Effectiveness Analysis. Analyses that involve constant-dollar costs should use the real Treasury borrowing rate on marketable securities of comparable maturity to the period of analysis. This rate is computed using the Administration's economic assumptions for the budget, which are published in January of each year. A table of discount rates based on the expected interest rates for the first year of the budget forecast is presented in Appendix C of this Circular. Appendix C is updated annually and is available upon request from OMB. Real Treasury rates are obtained by removing expected inflation over the period of analysis from nominal Treasury interest rates. (Analyses that involve nominal costs should use nominal Treasury rates for discounting, as described in the following paragraph.)
(2) Lease-Purchase Analysis. Analyses of nominal lease payments should use the nominal Treasury borrowing rate on marketable securities of comparable maturity to the period of analysis. Nominal Treasury -9-
borrowing rates should be taken from the economic assumptions for the budget. A table of discount rates based on these assumptions is presented in Appendix C of this Circular, which is updated annually. (Constant dollar lease-purchase analyses should use the real Treasury borrowing rate, described in the preceding paragraph.)
(3) Internal Government Investments. Some Federal investments provide "internal" benefits which take the form of increased Federal revenues or decreased Federal costs. An example would be an investment in an energy-efficient building system that reduces Federal operating costs. Unlike the case of a Federally funded highway (which provides "external" benefits to society as a whole), it is appropriate to calculate such a project's net present value using a comparable-maturity Treasury rate as a discount rate. The rate used may be either nominal or real, depending on how benefits and costs are measured.
Some Federal activities provide a mix of both Federal cost savings and external social benefits. For example, Federal investments in information technology can produce Federal savings in the form of lower administrative costs and external social benefits in the form of faster claims processing. The net present value of such investments should be evaluated with the 7 percent real discount rate discussed in Section 8.b. unless the analysis is able to allocate the investment's costs between provision of Federal cost savings and external social benefits. Where such an allocation is possible, Federal cost savings and their associated investment costs may be discounted at the Treasury rate, while the external social benefits and their associated investment costs should be discounted at the 7 percent real rate.
(4) Asset Sale Analysis. Analysis of possible asset sales should reflect the following:
(a) The net present value to the Federal Government of holding an asset is best measured by discounting its future earnings stream using a Treasury rate. The rate used may be either nominal or real, depending on how earnings are measured.
(b) Analyses of government asset values should explicitly deduct the cost of expected defaults or delays in payment from projected cash flows, along with government administrative costs. Such analyses should also consider explicitly the probabilities of events that would cause the asset to become nonfunctional, impaired or obsolete, as well as probabilities of events that would increase asset value. (c) Analyses of possible asset sales should assess the gain in social efficiency that can result when a government asset is subject to market discipline and private incentives. Even though a government asset may be used more efficiently in the private sector, potential private-sector purchasers will generally discount such an asset's earnings at a rate in excess of the Treasury rate, in part, due to the cost of bearing risk. When there is evidence that government assets can be used more efficiently in the private sector, valuation -10-
analyses for these assets should include sensitivity comparisons that discount the returns from such assets with the rate of interest earned by assets of similar riskiness in the private sector.
9. Treatment of Uncertainty. Estimates of benefits and costs are typically uncertain because of imprecision in both underlying data and modeling assumptions. Because such uncertainty is basic to many analyses, its effects should be analyzed and reported. Useful information in such a report would include the key sources of uncertainty; expected value estimates of outcomes; the sensitivity of results to important sources of uncertainty; and where possible, the probability distributions of benefits, costs, and net benefits. a. Characterizing Uncertainty. Analyses should attempt to characterize the sources and nature of uncertainty. Ideally, probability distributions of potential benefits, costs, and net benefits should be presented. It should be recognized that many phenomena that are treated as deterministic or certain are, in fact, uncertain. In analyzing uncertain data, objective estimates of probabilities should be used whenever possible. Market data, such as private insurance payments or interest rate differentials, may be useful in identifying and estimating relevant risks. Stochastic simulation methods can be useful for analyzing such phenomena and developing insights into the relevant probability distributions. In any case, the basis for the probability distribution assumptions should be reported. Any limitations of the analysis because of uncertainty or biases surrounding data or assumptions should be discussed. b. Expected Values. The expected values of the distributions of benefits, costs and net benefits can be obtained by weighting each outcome by its probability of occurrence, and then summing across all potential outcomes. If estimated benefits, costs and net benefits are characterized by point estimates rather than as probability distributions, the expected value (an unbiased estimate) is the appropriate estimate for use.
Estimates that differ from expected values (such as worst-case estimates) may be provided in addition to expected values, but the rationale for such estimates must be clearly presented. For any such estimate, the analysis should identify the nature and magnitude of any bias. For example, studies of past activities have documented tendencies for cost growth beyond initial expectations; analyses should consider whether past experience suggests that initial estimates of benefits or costs are optimistic. c. Sensitivity Analysis. Major assumptions should be varied and net present value and other outcomes recomputed to determine how sensitive outcomes are to changes in the assumptions. The assumptions that deserve the most attention will depend on the dominant benefit and cost elements and the areas of greatest uncertainty of the program being analyzed. For example, in analyzing a retirement program, one would consider changes in the number of beneficiaries, future wage growth, inflation, and the discount rate. In general, sensitivity analysis should be considered for estimates of: (i) benefits and costs; (ii) the discount rate; (iii) the general inflation rate; and (iv) distributional assumptions. Models used in the -11-
analysis should be well documented and, where possible, available to facilitate independent review. d. Other Adjustments for Uncertainty. The absolute variability of a risky outcome can be much less significant than its correlation with other significant determinants of social welfare, such as real national income. In general, variations in the discount rate are not the appropriate method of adjusting net present value for the special risks of particular projects. In some cases, it may be possible to estimate certainty-equivalents which involve adjusting uncertain expected values to account for risk.
10. Incidence and Distributional Effects. The principle of maximizing net present value of benefits is based on the premise that gainers could fully compensate the losers and still be better off. The presence or absence of such compensation should be indicated in the analysis. When benefits and costs have significant distributional effects, these effects should be analyzed and discussed, along with the analysis of net present value. (This will not usually be the case for cost-effectiveness analysis where the scope of government activity is not changing.) a. Alternative Classification. Distributional effects may be analyzed by grouping individuals or households according to income class (e.g., income quintiles), geographical region, or demographic group (e.g., age). Other classifications, such as by industry or occupation, may be appropriate in some circumstances.
Analysis should aim at identifying the relevant gainers and losers from policy decisions. Effects on the preexisting assignment of property rights by the program under analysis should be reported. Where a policy is intended to benefit a specified subgroup of the population, such as the poor, the analysis should consider how effective the policy is in reaching its targeted group. b. Economic Incidence. Individuals or households are the ultimate recipients of income; business enterprises are merely intermediaries. Analyses of distribution should identify economic incidence, or how costs and benefits are ultimately borne by households or individuals.
Determining economic incidence can be difficult because benefits and costs are often redistributed in unintended and unexpected ways. For example, a subsidy for the production of a commodity will usually raise the incomes of the commodity's suppliers, but it can also benefit consumers of the commodity through lower prices and reduce the incomes for suppliers of competing products. A subsidy also raises the value of specialized resources used in the production of the subsidized commodity. As the subsidy is incorporated in asset values, its distributional effects can change.
11. Special Guidance for Public Investment. This guidance applies only to public investments with social benefits apart from decreased Federal costs. It is not required for cost-effectiveness or lease-purchase analyses. Because taxes generally distort relative prices, they impose a burden in excess of the revenues -12- they raise. Recent studies of the U.S. tax system suggest a range of values for the marginal excess burden, of which a reasonable estimate is 25 cents per dollar of revenue. a. Analysis of Excess Burdens. The presentation of results for public investments that are not justified on cost-saving grounds should include a supplementary analysis with a 25 percent excess burden. Thus, in such analyses, costs in the form of public expenditures should be multiplied by a factor of 1.25 and net present value recomputed. b. Exceptions. Where specific information clearly suggests that the excess burden is lower (or higher) than 25 percent, analyses may use a different figure. When a different figure is used, an explanation should be provided for it. An example of such an exception is an investment funded by user charges that function like market prices; in this case, the excess burden would be zero. Another example would be a project that provides both cost savings to the Federal Government and external social benefits. If it is possible to make a quantitative determination of the portion of this project's costs that give rise to Federal savings, that portion of the costs may be exempted from multiplication by the factor of 1.25.
12. Special Guidance for Regulatory Impact Analysis. Additional guidance for analysis of regulatory policies is provided in Regulatory Program of the United States Government which is published annually by OMB. (See "Regulatory Impact Analysis Guidance," Appendix V of Regulatory Program of the United States Government for April 1, 1991 to March 31, 1992.)
13. Special Guidance for Lease-Purchase Analysis. The special guidance in this section does not apply to the decision to acquire the use of an asset. In deciding that, the agency should conduct a benefit-cost analysis, if possible. Only after the decision to acquire the services of an asset has been made is there a need to analyze the decision whether to lease or purchase. a. Coverage. The Circular applies only when both of the following tests of applicability are satisfied:
(1) The lease-purchase analysis concerns a capital asset, (including durable goods, equipment, buildings, facilities, installations, or land) which:
(a) Is leased to the Federal Government for a term of three or more years; or,
(b) Is new, with an economic life of less than three years, and leased to the Federal Government for a term of 75 percent or more of the economic life of the asset; or,
(c) Is built for the express purpose of being leased to the Federal Government; or,
(d) Is leased to the Federal Government and clearly has no alternative commercial use (e.g., a special- purpose government installation). -13-
(2) The lease-purchase analysis concerns a capital asset or a group of related assets whose total fair market value exceeds $1 million. b. Required Justification for Leases. All leases of capital assets must be justified as preferable to direct government purchase and ownership. This can be done in one of three ways:
(1) By conducting a separate lease-purchase analysis. This is the only acceptable method for major acquisitions. A lease represents a major acquisition if:
(a) The acquisition represents a separate line-item in the agency's budget;
(b) The agency or OMB determines the acquisition is a major one; or
(c) The total purchase price of the asset or group of assets to be leased would exceed $500 million.
(2) By conducting periodic lease-purchase analyses of recurrent decisions to lease similar assets used for the same general purpose. Such analyses would apply to the entire class of assets. OMB approval should be sought in determining the scope of any such generic analysis.
(3) By adopting a formal policy for smaller leases and submitting that policy to the OMB for approval. Following such a policy should generally result in the same lease- purchase decisions as would conducting separate lease- purchase analyses. Before adopting the policy, it should be demonstrated that:
(a) The leases in question would generally result in substantial savings to the Government that could not be realized on a purchase;
(b) The leases are so small or so short-term as to make separate lease-purchase analysis impractical; and
(c) Leases of different types are scored consistently with the instructions in Appendices B and C of OMB Circular No. A-11. c. Analytical Requirements and Definitions. Whenever a Federal agency needs to acquire the use of a capital asset, it should do so in the way that is least expensive for the Government as a whole.
(1) Life-Cycle Cost. Lease-purchase analyses should compare the net discounted present value of the life-cycle cost of leasing with the full costs of buying or constructing an identical asset. The full costs of buying include the asset's purchase price plus the net discounted present value of any relevant ancillary services connected with the purchase. (Guidance on the discount rate to use for lease-purchase analysis is in Section 8.c.) -14-
(2) Economic Life. For purposes of lease-purchase analysis, the economic life of an asset is its remaining or productive lifetime. It begins when the asset is acquired and ends when the asset is retired from service. The economic life is frequently not the same as the useful life for tax purposes.
(3) Purchase Price. The purchase price of the asset for purposes of lease-purchase analysis is its fair market value, defined as the price a willing buyer could reasonably expect to pay a willing seller in a competitive market to acquire the asset.
(a) In the case of property that is already owned by the Federal Government or that has been donated or acquired by condemnation, an imputed purchase price should be estimated. (Guidance on making imputations is provided in Section 13.c.(6).)
(b) If public land is used for the site of the asset, the imputed market value of the land should be added to the purchase price.
(c) The asset's estimated residual value, as of the end of the period of analysis, should be subtracted from its purchase price. (Guidance on estimating residual value is provided in Section 13.c.(7).)
(4) Taxes. In analyzing the cost of a lease, the normal payment of taxes on the lessor's income from the lease should not be subtracted from the lease costs since the normal payment of taxes will also be reflected in the purchase cost. The cost to the Treasury of special tax benefits, if any, associated with the lease should be added to the cost of the lease. Examples of such tax benefits might include highly accelerated depreciation allowances or tax-free financing.
(5) Ancillary Services. If the terms of the lease include ancillary services provided by the lessor, the present value of the cost of obtaining these services separately should be added to the purchase price. Such costs may be excluded if they are estimated to be the same for both lease and purchase alternatives or too small to affect the comparison. Examples of ancillary services include:
(a) All costs associated with acquiring the property and preparing it for use, including construction, installation, site, design, and management costs.
(b) Repair and improvement costs (if included in lease payments).
(c) Operation and maintenance costs (if included in lease payments).
(d) Imputed property taxes (excluding foreign property taxes on overseas acquisitions except where actually paid). The imputed taxes approximate the costs of providing municipal services such as water, sewage, and police and fire protection. (See Section (6) below.) -15-
(e) Imputed insurance premiums. (See Section (6) below.)
(6) Estimating Imputed Costs. Certain costs associated with the Federal purchase of an asset may not involve a direct monetary payment. Some of these imputed costs may be estimated as follows.
(a) Purchase Price. An imputed purchase price for an asset that is already owned by the Federal Government or which has been acquired by donation or condemnation should be based on the fair market value of similar properties that have been traded on commercial markets in the same or similar localities. The same method should be followed in estimating the imputed value of any Federal land used as a site for the asset.
(b) Property Taxes. Imputed property taxes may be estimated in two ways.
(i) Determine the property tax rate and assessed (taxable) value for comparable property in the intended locality. If there is no basis on which to estimate future changes in tax rates or assessed values, the first-year tax rate and assessed value (inflation adjusted for each subsequent year) can be applied to all years. Multiply the assessed value by the tax rate to determine the annual imputation for property taxes.
(ii) As an alternative to step (i) above, obtain an estimate of the current local effective property tax rate from the Building Owners and Managers Association's Regional Exchange Reports. Multiply the fair market value of the government-owned property (inflation adjusted for each year) by the effective tax rate.
(c) Insurance Premiums. Determine local estimates of standard commercial coverage for similar property from the Building Owners and Managers Association's Regional Exchange Reports.
(7) Residual Value. A property's residual value is an estimate of the price that the property could be sold for at the end of the period of the lease-purchase analysis, measured in discounted present value terms.
(a) The recommended way to estimate residual value is to determine what similar, comparably aged property is currently selling for in commercial markets.
(b) Alternatively, book estimates of the resale value of used property may be available from industry or government sources.
(c) Assessed values of similar, comparably aged properties determined for property tax purposes may also be used.
(8) Renewal Options. In determining the term of a lease, all renewal options shall be added to the initial lease period. -16-
14. Related Guidance. a. OMB Circular No. A-11, "Preparation and Submission of Annual Budget Estimates." b. OMB Circular No. A-19, "Legislative Coordination and Clearance." c. OMB Circular No. A-70, "Federal Credit Policy." d. OMB Circular No. A-76, "Performance of Commercial Activities." e. OMB Circular No. A-109, "Policies to Be Followed in the Acquisition of Major Systems." f. OMB Circular No. A-130, "Management of Federal Information Resources." 9. "Joint OMB and Treasury Guidelines to the Department of Defense Covering Lease or Charter Arrangements for Aircraft and Naval Vessels." h. Executive Order 12291, "Federal Regulation." i. "Regulatory Impact Analysis Guidance," in Regulatory Program of the United States Government. j. "Federal Energy Management and Planning Programs; Life Cycle Cost Methodology and Procedures," Federal Register, Vol. 55, No. 17, January 25, 1990, and Vol. 55, No. 224, November 20, 1990. k. Presidential Memorandum of April 29, 1992, "Benefits and Costs of Legislative Proposals."
15. Implementation. Economic analyses submitted to OMB will be reviewed for conformity with Items 5 to 13 in this Circular, through the Circular No. A-11 budget justification and submission process, and Circular No. A-19, legislative review process.
16. Effective Date. This Circular is effective immediately.
17. Interpretation. Questions concerning interpretation of this Circular should be addressed to the Office of Economic Policy, Office of Management and Budget (202-395-5873) or, in the case of regulatory issues and analysis, to the Office of Information and Regulatory Affairs (202-395-4852). -17-
APPENDIX A
DEFINITION OF TERMS
Benefit-Cost Analysis -- A systematic quantitative method of assessing the desirability of government projects or policies when it is important to take a long view of future effects and a broad view of possible side-effects.
Capital Asset -- Tangible property, including durable goods, equipment, buildings, installations, and land.
Certainty-Equivalent -- A certain (i.e., nonrandom) outcome that an individual values equally to an uncertain outcome. For a riskaverse individual, the certainty-equivalent for an uncertain set of benefits may be less than the mathematical expectation of the outcome; for example, an individual may value a 50-50 chance of winning $100 or $0 as only $45. Analogously, a risk-averse individual may have a certainty-equivalent for an uncertain set of costs that is larger in magnitude than the mathematical expectation of costs.
Cost-Effectiveness -- A systematic quantitative method for comparing the costs of alternative means of achieving the same stream of benefits or a given objective.
Consumer Surplus -- The maximum sum of money a consumer would be willing to pay to consume a given amount of a good, less the amount actually paid. It is represented graphically by the area between the demand curve and the price line in a diagram representing the consumer's demand for the good as a function of its price.
Discount Rate -- The interest rate used in calculating the present value of expected yearly benefits and costs.
Discount Factor -- The factor that translates expected benefits or costs in any given future year into present value terms. The discount factor is equal to 1/(1 + i)t where i is the interest rate and t is the number of years from the date of initiation for the program or policy until the given future year.
Excess Burden -- Unless a tax is imposed in the form of a lump sum unrelated to economic activity, such as a head tax, it will affect economic decisions on the margin. Departures from economic efficiency resulting from the distorting effect of taxes are called excess burdens because they disadvantage society without adding to Treasury receipts. This concept is also sometimes referred to as deadweight loss.
External Economy or Diseconomy -- A direct effect, either positive or negative, on someone's profit or welfare arising as a byproduct of some other person's or firm's activity. Also referred to as neighborhood or spillover effects, or externalities for short.
Incidence -- The ultimate distributional effect of a tax, expenditure, or regulatory program.
Inflation -- The proportionate rate of change in the general price level, as opposed to the proportionate increase in a specific price. Inflation is usually -18- measured by a broad-based price index, such as the implicit deflator for Gross Domestic Product or the Consumer Price Index.
Internal Rate of Return -- The discount rate that sets the net present value of the stream of net benefits equal to zero. The internal rate of return may have multiple values when the stream of net benefits alternates from negative to positive more than once.
Life Cycle Cost -- The overall estimated cost for a particular program alternative over the time period corresponding to the life of the program, including direct and indirect initial costs plus any periodic or continuing costs of operation and maintenance.
Multiplier -- The ratio between the direct effect on output or employment and the full effect, including the effects of second order rounds or spending. Multiplier effects greater than 1.0 require the existence of involuntary unemployment.
Net Present Value -- The difference between the discounted present value of benefits and the discounted present value of costs.
Nominal Values -- Economic units measured in terms of purchasing power of the date in question. A nominal value reflects the effects of general price inflation.
Nominal Interest Rate -- An interest rate that is not adjusted to remove the effects of actual or expected inflation. Market interest rates are generally nominal interest rates.
Opportunity Cost -- The maximum worth of a good or input among possible alternative uses.
Real or Constant Dollar Values -- Economic units measured in terms of constant purchasing power. A real value is not affected by general price inflation. Real values can be estimated by deflating nominal values with a general price index, such as the implicit deflator for Gross Domestic Product or the Consumer Price Index.
Real Interest Rate -- An interest rate that has been adjusted to remove the effect of expected or actual inflation. Real interest rates can be approximated by subtracting the expected or actual inflation rate from a nominal interest rate. (A precise estimate can be obtained by dividing one plus the nominal interest rate by one plus the expected or actual inflation rate, and subtracting one from the resulting quotient.)
Relative Price -- A price ratio between two goods as, for example, the ratio of the price of energy to the price of equipment.
Shadow Price -- An estimate of what the price of a good or input would be in the absence of market distortions, such as externalities or taxes. For example, the shadow price of capital is the present value of the social returns to capital (before corporate income taxes) measured in units of consumption. -19-
Sunk Cost -- A cost incurred in the past that will not be affected by any present or future decision. Sunk costs should be ignored in determining whether a new investment is worthwhile.
Transfer Payment -- A payment of money or goods. A pure transfer is unrelated to the provision of any goods or services in exchange. Such payments alter the distribution of income, but do not directly affect the allocation of resources on the margin.
Treasury Rates -- Rates of interest on marketable Treasury debt. Such debt is issued in maturities ranging from 91 days to 30 years.
Willingness to Pay -- The maximum amount an individual would be willing to give up in order to secure a change in the provision of a good or service. -20-
APPENDIX B
ADDITIONAL GUIDANCE FOR DISCOUNTING
1. Sample Format for Discounting Deferred Costs and Benefits
Assume a 10-year program which will commit the Government to the stream of real (or constant-dollar) expenditures appearing in column (2) of the table below and which will result in a series of real benefits appearing in column (3). The discount factor for a 7 percent discount rate is shown in column (4). The present value cost for each of the 10 years is calculated by multiplying column (2) by column (4); the present value benefit for each of the 10 years is calculated by multiplying column (3) by column (4). The present values of costs and benefits are presented in columns (5) and (6) respectively. Present Present Year since value of value of initiation, Expected Expected Discount costs benefits renewal or yearly yearly factors Col. 2 x Col. 3 x expansion cost benefit for 7% Col. 4 Col. 4 (1) (2) (3) (4) (5) (6)
1 $10.00 $ 0.00 0.9346 $ 9.35 $ 0.00 2 20.00 0.00 0.8734 17.47 0.00 3 30.00 5.00 0.8163 24.49 4.08 4 30.00 10.00 0.7629 22.89 7.63 5 20.00 30.00 0.7130 14.26 21.39 6 10.00 40.00 0.6663 6.66 26.65 7 5.00 40.00 0.6227 3.11 24.91 8 5.00 40.00 0.5820 2.91 23.28 9 5.00 40.00 0.5439 2.72 21.76 10 5.00 25.00 0.5083 2.54 12.71 Total $106.40 $142.41
NOTE: The discount factor is calculated as 1/(1 + i)t where i is the interest rate (.07) and t is the year.
The sum of column (5) is the total present value of costs and the sum of column (6) is the total present value of benefits. Net present value is $36.01, the difference between the sum of discounted benefits and the sum of discounted costs.
2. End-of-Year and Mid-Year Discount Factors
The discount factors presented in the table above are calculated on the implicit assumption that costs and benefits occur as lump sums at year-end. When costs and benefits occur in a steady stream, applying mid-year discount factors is more appropriate. For instance, the first cost in the table may be estimated to occur -21- after six months, rather than at the end of one year to approximate better a steady stream of costs and benefits occurring over the first year. Similarly, it may be assumed that all other costs and benefits are advanced six months to approximate better a continuing steady flow.
The present values of costs and benefits computed from the table above can be converted to a mid-year discounting basis by multiplying them by 1.0344 (the square root of 1.07). Thus, if the above example were converted to a mid-year basis, the present value of costs would be $110.06, the present value of benefits would be $147.31, and the net present value would be $37.25.
3. Illustrative Discount Factors for Discount Rate of 7 percent
Year since Beginning- Initiation, Year-end Mid-year of-year Renewal or Discount Discount Discount Expansion Factors Factors Factors
1 0.9346 0.9667 1.0000 2 0.8734 0.9035 0.9346 3 0.8163 0.8444 0.8734 4 0.7629 0.7891 0.8163 5 0.7130 0.7375 0.7629 6 0.6663 0.6893 0.7130 7 0.6227 0.6442 0.6663 8 0.5820 0.6020 0.6227 9 0.5439 0.5626 0.5820 10 0.5083 0.5258 0.5439 11 0.4751 0.4914 0.5083 12 0.4440 0.4593 0.4751 13 0.4150 0.4292 0.4440 14 0.3878 0.4012 0.4150 15 0.3624 0.3749 0.3878 16 0.3387 0.3504 0.3624 17 0.3166 0.3275 0.3387 18 0.2959 0.3060 0.3166 19 0.2765 0.2860 0.2959 20 0.2584 0.2673 0.2765 21 0.2415 0.2498 0.2584 22 0.2257 0.2335 0.2415 23 0.2109 0.2182 0.2257 24 0.1971 0.2039 0.2109 25 0.1842 0.1906 0.1971 26 0.1722 0.1781 0.1842 27 0.1609 0.1665 0.1722 28 0.1504 0.1556 0.1609 29 0.1406 0.1454 0.1504 30 0.1314 0.1359 0.1406
APPENDIX C: Discount Rates for Cost-Effectiveness, Lease-Purchase, and Related Analyses December 6, 2012 BUDGET ASSUMPTIONS Nominal Treasury Interest Rates for Different Maturities (from the annual budget assumptions for the first year of the budget forecast)
Calendar Year 3-Year 5-Year 7-Year 10-Year 20-Year 30-Year
1979 9.7 9.2 9.1 9.0 #N/A 8.9 1980 10.9 10.6 10.6 10.6 #N/A 10.4 1981 13.4 12.8 12.6 12.2 #N/A 11.8 1982 12.8 13.1 13.2 13.3 #N/A 13.0 1983 9.5 9.8 10.0 10.2 #N/A 10.3 1984 9.8 10.0 10.1 10.3 #N/A 10.4 1985 10.3 10.7 10.8 11.0 #N/A 11.0 1986 8.6 8.8 8.8 8.9 #N/A 9.1 1987 6.3 6.5 6.6 6.7 #N/A 7.0 1988 7.3 7.7 7.8 8.0 #N/A 8.1 1989 7.8 8.1 8.2 8.3 #N/A 8.2 1990 7.4 7.5 7.6 7.7 #N/A 7.8 1991 7.2 7.4 7.4 7.5 #N/A 7.7 1992 6.1 6.5 6.7 7.0 #N/A 7.1 1993 5.6 6.0 6.3 6.7 #N/A 6.8 1994 5.0 5.3 5.5 5.7 #N/A 5.8 1995 7.3 7.6 7.7 7.9 #N/A 8.1 1996 5.4 5.5 5.5 5.6 #N/A 5.7 1997 5.8 5.9 6.0 6.1 #N/A 6.3 1998 5.6 5.7 5.8 5.9 #N/A 6.1 1999 4.7 4.8 4.9 4.9 #N/A 5.0 2000 5.9 6.0 6.0 6.1 #N/A 6.3 2001 5.4 5.4 5.4 5.4 #N/A 5.3 2002 4.1 4.5 4.8 5.1 #N/A 5.8 2003 3.1 3.6 3.9 4.2 #N/A 5.1 2004 3.0 3.7 4.2 4.6 5.4 5.5 2005 3.7 4.1 4.4 4.6 5.2 5.2 2006 4.7 4.8 4.9 5.0 5.3 5.2 2007 4.9 4.9 4.9 5.0 5.1 5.1 2008 4.1 4.3 4.4 4.6 4.9 4.9 2009 2.7 3.3 3.7 4.2 4.7 4.5 2010 2.3 3.1 3.5 3.9 4.4 4.5 2011 1.4 1.9 2.4 3.0 3.9 4.2 2012 1.6 2.1 2.5 2.8 3.5 3.8 2013 0.5 1.1 1.5 2.0 2.7 3.0
Real Treasury Interest Rates
3-Year 5-Year 7-Year 10-Year 20-Year 30-Year
1979 2.8 3.4 4.1 4.6 #N/A 5.4 1980 2.1 2.4 2.9 3.3 #N/A 3.7 1981 3.6 3.9 4.3 4.4 #N/A 4.8 1982 6.1 7.1 7.5 7.8 #N/A 7.9 1983 4.2 4.7 5.0 5.3 #N/A 5.6 1984 5.0 5.4 5.7 6.1 #N/A 6.4 1985 5.9 6.5 6.8 7.1 #N/A 7.4 1986 4.6 5.1 5.6 5.9 #N/A 6.7 1987 2.8 3.1 3.5 3.8 #N/A 4.4 1988 3.5 4.2 4.7 5.1 #N/A 5.6 1989 4.1 4.8 5.3 5.8 #N/A 6.1 1990 3.2 3.6 3.9 4.2 #N/A 4.6 1991 3.2 3.5 3.7 3.9 #N/A 4.2 1992 2.7 3.1 3.3 3.6 #N/A 3.8 1993 3.1 3.6 3.9 4.3 #N/A 4.5 1994 2.1 2.3 2.5 2.7 #N/A 2.8 1995 4.2 4.5 4.6 4.8 #N/A 4.9 1996 2.6 2.7 2.8 2.8 #N/A 3.0 1997 3.2 3.3 3.4 3.5 #N/A 3.6 1998 3.4 3.5 3.5 3.6 #N/A 3.8 1999 2.6 2.7 2.7 2.7 #N/A 2.9 2000 3.8 3.9 4.0 4.0 #N/A 4.2 2001 3.2 3.2 3.2 3.2 #N/A 3.2 2002 2.1 2.8 3.0 3.1 #N/A 3.9 2003 1.6 1.9 2.2 2.5 #N/A 3.2 2004 1.6 2.1 2.4 2.8 3.4 3.5 2005 1.7 2.0 2.3 2.5 3.0 3.1 2006 2.5 2.6 2.7 2.8 3.0 3.0 2007 2.5 2.6 2.7 2.8 3.0 3.0 2008 2.1 2.3 2.4 2.6 2.8 2.8 2009 0.9 1.6 1.9 2.4 2.9 2.7 2010 0.9 1.6 1.9 2.2 2.7 2.7 2011 0.0 0.4 0.8 1.3 2.1 2.3 2012 0.0 0.4 0.7 1.1 1.7 2.0 2013 -1.4 -0.8 -0.4 0.1 0.8 1.1 USDOT TIGER Grant Resource
Benefit-Cost Analysis (BCA) Resource Guide
11 TIGER BENEFIT-COST ANALYSIS (BCA) RESOURCE GUIDE
How to Use This Guide This BCA Resource Guide is a supplement to Appendix A: Additional Information on Benefit-Cost Analysis, as found in the January 31, 2012, Federal Register’s Notice of Funding Availability (NOFA) for TIGER Grants (http://www.gpo.gov/fdsys/pkg/FR-2012-01-31/pdf/2012-1996.pdf). It provides technical information that Applicants will need for monetizing benefits and costs in their Benefit-Cost Analyses, as well as guidance on methodology and a selection of frequently asked questions from past TIGER grant applicants.
This guide is divided into three sections: I. Recommended Monetized Values For the purposes of providing as fair an “apples-to-apples” comparison as possible, applicants should use standard monetization values recommended in this section, which represent some of the values that are accepted for common practice at the U.S. Department of Transportation. II. Technical Methodologies This section provides guidance on the technical details of monetizing carbon dioxide (CO2) emissions costs according to the Social Cost of Carbon standard developed by Federal agencies, converting nominal dollars into real dollars, and calculating the value of fatalities and injuries from vehicular crashes. III. Frequently Asked Questions (FAQs) This section provides answers to frequently asked questions from past TIGER applicants, with topics ranging from the logistical to the technical.
Updates to this document will be dated accordingly (with the nature of the updates noted on this cover page) and posted to the TIGER Discretionary Grants website (http://www.dot.gov/tiger).
Updated 2/1/12
TIGER BCA Resource Guide Page 1 of 19 I. Recommended Monetized Values
Each project generates unique impacts in its respective community, and the TIGER Evaluation process respects these differences, particularly within the context of benefit-cost analysis. While the impacts may differ from place to place, the Department does recognize certain monetized values (and monetizing methodologies) as standard, such that various projects from across the country may be evaluated on a more equivalent “apples-to-apples” basis of comparison. The following table summarizes key values for various types of benefits and costs that the Department recommends that applicants use in their benefit-cost analyses. However, benefits and costs for any reliable analysis are not limited only to this table. The applicant should provide documentation of sources and detailed calculations for monetized values of additional categories of benefits and costs. Similarly, applicants using different values for the benefit/cost categories presented below below should provide sources, calculations, and rationale for divergence from recommended values.
Table 1. Recommended Monetized Values Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes Value of Statistical Life $6,200,000 per fatality ($2011) Treatment of the Economic Value of a (VSL) Statistical Life in Departmental Analyses (2008 revised guidance and 2011 update) http://ostpxweb.dot.gov/policy/reports.htm
Value of Injuries Treatment of the Economic Value of a AIS Level Severity Fraction of VSL Unit value ($2011) Statistical Life in Departmental Analyses (2008 revised guidance and 2011 update) AIS 1 Minor 0.003 $ 18,600 http://ostpxweb.dot.gov/policy/reports.htm AIS 2 Moderate 0.047 $ 291,400 AIS 3 Serious 0.105 $ 651,000 NOTE: Accident data (particularly those provided AIS 4 Severe 0.266 $ 1,649,200 through law enforcement records) are typically AIS 5 Critical 0.593 $ 3,676,600 reported as a single number (e.g. “X number of AIS 6 Unsurvivable 1.000 $ 6,200,000 crashes in Year Y”) and/or on the KABCO scale of crash severity. Applicants should convert these values to the AIS scale before applying the recommended monetized values. See Part II Section 3 (“Converting Available Accident Data into AIS Data”).
TIGER BCA Resource Guide Page 2 of 19 Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes Property Damage Only $3,285 per vehicle crash ($2010) The Economic Impact of Motor Vehicle (PDO) Crashes Crashes 2000 http://www.nhtsa.gov/DOT/NHTSA/Communi cation%20&%20Consumer%20Information/Ar ticles/Associated%20Files/EconomicImpact20 00.pdf
NOTE: PDO value of $3,285 per vehicle crash is an updated value currently used by NHTSA and based on the methodology and original 2000 dollar value referenced in The Economic Impact of Motor Vehicle Crashes 2000 source document (Page 62, Table A-1, “Summary of Unit Costs, 2000”). Also, while the cost of PDO crashes is presented here in 2010 dollars, as it was in the source document, applicants should convert this value (along with other monetized values presented in this section) to dollars applicable to whatever base year you are using, using the methodology discussed below in Part II, Section 2 (“Converting Nominal Dollars into Real (Constant) Dollars”).
TIGER BCA Resource Guide Page 3 of 19 Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Value of Travel Time Revised Departmental Guidance on Valuation Recommended Hourly Values of Travel Time Savings of Travel Time in Economic Analysis (Revision 2 (2009 U.S. $ per person-hour) – corrected) Surface Modes* Air and Category http://ostpxweb.dot.gov/policy/reports.htm (except High-Speed Rail) High-Speed Rail Travel Local Travel Personal $12.00 Business $22.90 All Purposes ** $12.50
Intercity Travel Personal $16.70 $31.90 Business $22.90 $62.60 All Purposes ** $18.00 $44.30
Truck Drivers $23.70 Bus Drivers $23.60 Transit Rail Operators $38.90 Locomotive Engineers $33.00 Airline Pilots and Engineers $73.30
* Surface figures apply to all combinations of in-vehicle and other transit time. Walk access, waiting, and transfer time in personal travel should be valued at $23.90 per hour for personal travel when actions affect only those elements of travel time. ** These are weighted averages, using distributions of travel by trip purpose on various modes. Distribution for local travel by surface modes: 95.4% personal, 4.6% business. Distribution for intercity travel by conventional surface modes: 78.6% personal, 21.4% business. Distribution for intercity travel by air or high-speed rail: 59.6% personal, 40.4% business. Surface figures derived using annual person-miles of travel (PMT) data from the 2001 National Household Travel Survey. http://nhts.ornl.gov/. Air figures use person-trip data.
TIGER BCA Resource Guide Page 4 of 19 Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Value of Emissions Corporate Average Fuel Economy for MY2012- $ / long ton $ / metric ton Emission Type MY2016 Passenger Cars and Light Trucks ($2007) ($2007) (March 2010), page 403, Table VIII-8, Carbon dioxide (CO2) (varies)* (varies)* "Economic Values for Benefits Computations Volatile Organic Compounds (VOCs) $1,300 $1,280 (2007 Dollars)" Nitrogen oxides (NOx) $5,300 $5,217 http://www.nhtsa.gov/staticfiles/rulemaking/p Particulate matter (PM) $290,000 $285,469 df/cafe/CAFE_2012-2016_FRIA_04012010.pdf Sulfur dioxide (SOx) $31,000 $30,516
* See “Social Cost of Carbon (3%)” values below. NOTE: Emissions units are commonly reported as “tons”, but there is a distinction between long tons and metric tons. In fact, only carbon dioxide emissions (as reported in the SCC guidance) are typically reported in metric tons, whereas emissions for VOCs, NOx, PMs, and SOx are measured in English (or “long”) tons. A metric ton is 2,205 lbs, and a long ton is 2,240 lbs – resulting in a difference of about 1.6% between the monetized values per metric vs long ton.
TIGER BCA Resource Guide Page 5 of 19 Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Social Cost of Carbon (3%) Social Cost of Carbon for Regulatory Impact 3% SCC 3% SCC Year Year Analysis Under Executive Order 12866 (2007$) (2007$) (February 2010), page 39, Table A-1 “Annual 2010 21.40 2031 33.40 SCC Values 2010-2050 (in 2007 dollars)” 2011 21.90 2032 34.10 http://www.epa.gov/oms/climate/regulations/ 2012 22.40 2033 34.70 scc-tsd.pdf 2013 22.80 2034 35.40 2014 23.30 2035 36.00 NOTE: 2015 23.80 2036 36.70 - SCC values are per unit metric ton of carbon 2016 24.30 2037 37.30 dioxide and already discounted forward to the 2017 24.80 2038 37.90 reference year (in 2007 nominal dollars). 2018 25.30 2039 38.60 - See Part II, Section 1 (“Clarification on the 2019 25.80 2040 39.20 Social Cost of Carbon (SCC) Guidance and the 2020 26.30 2041 39.80 Annual SCC Values”), for methodology of how 2021 27.00 2042 40.40 to use 3% SCC values in TIGER BCA. 2022 27.60 2043 40.90 2023 28.30 2044 41.50 2024 28.90 2045 42.10 2025 29.60 2046 42.60 2026 30.20 2047 43.20 2027 30.90 2048 43.80 2028 31.50 2049 44.40 2029 32.10 2050 44.90 2030 32.80
TIGER BCA Resource Guide Page 6 of 19 II. Technical Methodologies
1. Clarification on the Social Cost of Carbon (SCC) Guidance and the Annual SCC Values As noted in the recommended emissions values from Section I, there is no longer a fixed unit cost to carbon dioxide (CO2) emissions. The Federal interagency Social Cost of Carbon (SCC) guidance states that the value of carbon dioxide emissions changes over time and should be discounted at the lower discount rates of 2.5%, 3%, or 5%. However, the lack of 7% SCC values does not mean that applicants should ignore 7% discounting for the BCA. The document and its findings imply that carbon emissions are valued differently from other benefits and costs from the perspective of discount rate. Applicants should continue to calculate discounted present values for all benefits and costs (that exclude carbon dioxide emissions) at 7% and 3%, as recommended by OMB Circular A-941. To these non-carbon NPV benefits, the Applicant should then add the corresponding net value of carbon dioxide emissions, as calculated from the 3% SCC value. The methodology for calculating this net value of carbon dioxide emissions is described below: i. Determine your base year and the life cycle years for the project. Look up the corresponding 3% average value for each corresponding year in which the carbon dioxide emissions occur. The TIGER Program recommends the use of the 3% average values as provided in the document Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010)2, on page 39 in Table A-1 “Annual SCC Values 2010-2050 (in 2007 dollars)”. a. Example: Our project has base year 2012, with project life through 2020. We want to know how to value a carbon dioxide emissions reduction of 100 metric tons in 2020. b. [NOTE] The SCC values are given in 2007 dollars. You should convert these to your base year dollars by multiplying by the corresponding GDP deflator or CPI ratio. ii. Multiply the quantity of tons reduced in 2020 by the 3% SCC value in that same year. a. Example: 100 tons x $26.30 = $2630.00 benefits in 2020. iii. Discount forward the 2020 carbon dioxide benefits only to the base year (2012) present value at the same SCC discount rate (3%). Recall that
= (1 + ) 퐹푉 Where PV= Present discounted value푃푉 of a future 푡payment from year t 푖 FV = Future Value of payment in year t i = Discount rate applied t = Years in the future for payment (where base year of analysis is t = 0)
a. Example: NPV in 2012 (for year 2020 benefits) = $2630.00 / [(1.03)^8] = $2076.10 iv. Add the sum of these yearly NPV SCC values to the calculated net present value of all other benefits (which will exclude carbon emissions).
1 White House Office of Management and Budget, Circular A-94 Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs (October 29, 1992) (http://www.whitehouse.gov/sites/default/files/omb/assets/a94/a094.pdf). 2 Interagency Working Group on Social Cost of Carbon, United State Government, Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010) (http://www.epa.gov/oms/climate/regulations/scc-tsd.pdf).
TIGER BCA Resource Guide Page 7 of 19 a. Example: Add $2076.10 to the non-Carbon net benefits (discounted at 7% and 3%) for year 2020 to get the total NPV benefits for year 2020.
The spreadsheet on the following page demonstrates what the methodology would look like for a sample multi-year analysis.
TIGER BCA Resource Guide Page 8 of 19
Table 2. Sample Calculation for Applying Social Cost of Carbon to TIGER Benefit-Cost Analysis (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) CO2 Undiscounted NPV CO2 Non-CO2 Non-CO2 Net non-CO2 7% NPV Non- 3% NPV Non- 7% NPV Total 3% NPV Total Calendar Reduced 3% SCC CO2 Costs @ Costs @ 3% Year Benefits Costs Benefts CO2 Benefits CO2 Benefits Benefits Benefits Year (Metric (2007$) 3% Avg SCC Avg SCC (2007$) (2007$) [C+D] [E/(1.07^A)] [E/(1.03^A)] [F+K] [G+K] Tons) [H*I] [J/(1.03^A)] 0 2012 $0 $500,000 ($5,000,000) ($5,000,000) ($5,000,000) -25 $22.40 ($560.00) ($560.00) ($5,000,560) ($5,000,560) 1 2013 $0 ($1,500,000) ($1,500,000) ($1,401,869) ($1,456,311) -25 $22.80 ($570.00) ($553.40) ($1,402,423) ($1,456,864) 2 2014 $0 ($1,500,000) ($1,500,000) ($1,310,158) ($1,413,894) -25 $23.30 ($582.50) ($549.06) ($1,310,707) ($1,414,443) 3 2015 $5,000,000 ($150,000) $4,850,000 $3,959,045 $4,438,437 100 $23.80 $2,380.00 $2,178.04 $3,961,223 $4,440,615 4 2016 $5,000,000 ($150,000) $4,850,000 $3,700,042 $4,309,162 100 $24.30 $2,430.00 $2,159.02 $3,702,201 $4,311,321 5 2017 $5,000,000 ($150,000) $4,850,000 $3,457,983 $4,183,653 100 $24.80 $2,480.00 $2,139.27 $3,460,122 $4,185,792 6 2018 $5,000,000 ($150,000) $4,850,000 $3,231,760 $4,061,799 100 $25.30 $2,530.00 $2,118.84 $3,233,879 $4,063,917 7 2019 $5,000,000 ($150,000) $4,850,000 $3,020,336 $3,943,494 100 $25.80 $2,580.00 $2,097.78 $3,022,434 $3,945,592 8 2020 $5,000,000 ($150,000) $4,850,000 $2,822,744 $3,828,635 100 $26.30 $2,630.00 $2,076.15 $2,824,820 $3,830,711 TOTALS $12,479,882 $16,894,975 $13,318 $11,107 $12,490,989 $16,906,081
TIGER BCA Resource Guide Page 9 of 19 2. Converting Nominal Dollars into Real (Constant) Dollars
In providing the recommended monetized values from Section I, this Guide provides numbers from their original source documents whenever possible. This means that the various values provided (and any other additional figures found in the general BCA literature) are monetized in several different years’ dollars. However, establishing an “apples-to-apples” comparison of monetized benefits and costs requires a comparison of dollar values for a single base year. Conversion from nominal dollars into real (constant) dollars is a necessary task for Applicants. Two methods for conversion are discussed below.
GDP Price Deflators. In order to convert nominal dollars from one year to another, one can simply multiply by the ratio of annual GDP price deflators, as reported by the US Department of Commerce’s Bureau of Economic Analysis.3
In order to convert Year Y dollars into Year Z dollars, conduct the following calculation: (Year Z $) = (Year Y $) x [(Year Z GDP Price Deflator)/(Year Y GDP Price Deflator)]
i. Example: What is the 2010 real value of $1,000,000 earned in 2000 using annual GDP price deflators?
(2010 Real Value of $1,000,000) = ($1,000,000) x (110.992/88.723) = $1,250,994.67
Consumer Price Index (CPI). Another similar method of converting dollars is to multiply by the ratio of annual average Consumer Price Indices (CPIs), as reported by the US Department of Labor’s Bureau of Labor Statistics,4 as in the following calculation:
(Year Z $) = (Year Y $) x [(Year Z CPI)/(Year Y CPI)]
ii. Example: What is the 2010 real value of $1,000,000 earned in 2000 using annual average urban CPIs?
(2010 Real Value of $1,000,000) = ($1,000,000) x (218.056/172.2) = $1,266,295
It is worth noting that the CPI in the above example (and its corresponding hyperlink) is for urban areas only, and that BLS does provide CPI numbers for specific expenditure categories (see http://www.bls.gov/cpi/ for more comprehensive CPI data).
The differences between using the GDP price deflator and CPI are sufficiently small that either methodology is acceptable for the TIGER BCA. For the purposes of transparency, it would be useful for Applicants to note which method they used, if applicable.
3 U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts Table, Table 1.1.9. Implicit Price Deflators for Gross Domestic Product (http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=13&Freq=Qtr&FirstYear=2009&LastYear=2011). 4 U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index – All Urban Consumers (CPI-U), U.S. City Average, All Items (ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt).
TIGER BCA Resource Guide Page 10 of 19 3. Converting Available Accident Data into AIS Data
As indicated by the information in Section I, this Guide recommends monetizing the value of injuries according to the maximum Abbreviated Injury Scale (AIS).5 However, the Department does recognize that accident data that are available to Applicants may not be reported as AIS numbers. Law enforcement data may use the KABCO Scale, which is a measure of the observed severity of the victim’s functional injury at the crash scene. In some cases, the Applicant may only have a single reported number of accidents on a particular project site, but have no injury and/or injury severity data for any of those accidents. With accidents reported in KABCO-scale or with unknown injury/severity information, it is necessary for the Applicant to convert the available data into AIS.
Table 3. Comparison of Injury Severity Scales (KABCO vs AIS vs Unknown) Reported Accidents Reported Accidents (KABCO or # Accidents Reported) (AIS)
O No injury 0 No injury
C Possible Injury 1 Minor
B Non-incapacitating 2 Moderate
A Incapacitating 3 Serious
K Killed 4 Severe
U Injured (Severity Unknown) 5 Critical # Accidents Unknown if Injured 6 Unsurvivable Reported
The National Highway Traffic Safety Administration (NHTSA) provides a conversion matrix (Table 4) that allows KABCO-reported and generic accident data to be re-interpreted as AIS data. The premise of the matrix works in this way: it is understood that an injury observed and reported at the crash site may actually end up being more/less severe than the KABCO scale indicates. Similarly, any accident can – statistically speaking – generate a number of different injuries for the parties involved. Each column of the conversion matrix represents a probability distribution of the different AIS-level injuries that are statistically associated with a corresponding KABCO-scale injury or a generic accident.
5 The maximum Abbreviated Injury Scale is also sometimes represented by the acronym “MAIS.” For the purposes of this Guide, any reference to “MAIS” is equivalent to “AIS”. TIGER BCA Resource Guide Page 11 of 19
Table 4. KABCO/Unknown – AIS Data Conversion Matrix (1) (2) (3) (4) (5) (6) (7) (8) # Non-fatal O C B A K U Accidents Non- Injured Unknown if No injury Possible Injury Incapacitating Killed incapacitating Severity Unknown Injured 0 0.92534 0.23437 0.08347 0.03437 0.00000 0.21538 0.43676 1 0.07257 0.68946 0.76843 0.55449 0.00000 0.62728 0.41739 2 0.00198 0.06391 0.10898 0.20908 0.00000 0.10400 0.08872
AIS 3 0.00008 0.01071 0.03191 0.14437 0.00000 0.03858 0.04817 4 0.00000 0.00142 0.00620 0.03986 0.00000 0.00442 0.00617 5 0.00003 0.00013 0.00101 0.01783 0.00000 0.01034 0.00279 Fatality 0.00000 0.00000 0.00000 0.00000 1.00000 0.00000 0.00000
Sum(Prob) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 Source: National Highway Traffic Safety Administration, July 2011.
For example, if an injury is recorded as “O” on the KABCO scale at the crash site, there is about a 92.5% probability that it is indeed a “No injury” (AIS 0). But there is a 7.26% chance that it is a Minor injury (AIS 1), a 0.198% chance that it may turn out to be a Moderate injury (AIS 2), a small 0.008 chance that it is a Serious injury (AIS 3), and an even smaller 0.003% chance that it is actually a Critical injury (AIS 5). Recalling the Value of Injuries from Table 1, this would mean that one “O” reported injury is valued at about $2,089 (interpreted as a willingness-to-pay to avoid the accident). This value results from multiplying the “O” accident’s associated AIS-level probabilities by the recommended unit Value of Injuries, and then summing the products. Table 5. KABCO– AIS Data Conversion for KABCO “O” Accident "O" Unit Value of Recommended AIS Level Distribution of "O" Unit Value AIS Level Distribution AIS 0 0.92534 $ - $ - AIS 1 0.07257 $ 18,600 $ 1,349.80 AIS 2 0.00198 $ 291,400 $ 576.97 AIS 3 0.00008 $ 651,000 $ 52.08 AIS 4 0.00000 $ 1,649,200 $ - AIS 5 0.00003 $ 3,676,600 $ 110.30 AIS 6 0.00000 $ 6,200,000 $ - TOTAL $ 2,089.15
Tables 6 and 7 provide sample calculations for the monetization of fatalities and injuries from accidents. By converting KABCO data into AIS and then monetizing according to the recommended values, the Applicant represented in Table 6 may be providing a baseline value of fatalities and injuries caused by 27 accidents reported in the most recent calendar year.6 The same Applicant may have calculated the values in Table 7 to estimate their benefits of their project, which they anticipate may reduce accident rates (by at least one fatal accident and 5 non-fatal accidents per year).
6 Accident data may not be presented on an annual basis when it is provided to Applicants (i.e. an available report requested in Fall 2011 may record total accidents from 2005-2010). For the purposes of the BCA, is important to annualize data when possible. TIGER BCA Resource Guide Page 12 of 19 Table 6. Sample Calculation for Monetizing Value of 27 Reported KABCO-scaled Accidents (O=15, C-=5, B=5, A=3, K=2, U=2) (1) (2) (3) (4) (5) (6) (7) O C B A K U Injured No injury Possible Injury Non-incapacitating Incapacitating Killed Severity Unknown Accident Counts $ Value $ Value $ Value $ Value $ Value $ Value 15 5 5 3 2 2 by KABCO Level [Pr(AISx)*Value(AISx)] [Pr(AISx)*Value(AISx)] [Pr(AISx)*Value(AISx)] [Pr(AISx)*Value(AISx)] [Pr(AISx)*Value(AISx)] [Pr(AISx)*Value(AISx)] 0 13.88010 $ - 1.17185 $ - 0.41735 $ - 0.10311 $ - 0.00000 $ - 0.43076 $ - 1 1.08855 $ 20,247.03 3.44730 $ 64,119.78 3.84215 $ 71,463.99 1.66347 $ 30,940.54 0.00000 $ - 1.25456 $ 23,334.82 2 0.02970 $ 8,654.58 0.31955 $ 93,116.87 0.54490 $ 158,783.86 0.62724 $ 182,777.74 0.00000 $ - 0.20800 $ 60,611.20
AIS 3 0.00120 $ 781.20 0.05355 $ 34,861.05 0.15955 $ 103,867.05 0.43311 $ 281,954.61 0.00000 $ - 0.07716 $ 50,231.16 4 0.00000 $ - 0.00710 $ - 0.03100 $ - 0.11958 $ - 0.00000 $ - 0.00884 $ - 5 0.00045 $ 1,654.47 0.00065 $ 2,389.79 0.00505 $ 18,566.83 0.05349 $ 196,661.33 0.00000 $ - 0.02068 $ 76,032.09 Fatality 0.00000 $ - 0.00000 $ - 0.00000 $ - 0.00000 $ - 2.00000 $12,400,000.00 0.00000 $ - SUBTOTALS 15.00 $ 31,337.28 5.00 $ 194,487.49 5.00 $ 352,681.73 3.00 $ 692,334.22 2.00 $12,400,000.00 2.00 $ 210,209.26
TOTAL VALUE OF FATALITIES & INJURIES $ 13,881,049.99
Table 7. Sample Calculation for Monetizing Accident Reduction (1 Fatal Accident, 5 Non-fatal Accidents) (1) (2) (3) Fatal Accidents # Non-fatal Accidents # Fatalities at Crash Site Unknown if Injured $ Value $ Value Accident Counts 1 5 Fatalities * VSL [Pr(AISx)*Value(AISx)] 0 0.00000 $ - 2.18380 $ - 1 0.00000 $ - 2.08695 $ 38,817.27 2 0.00000 $ - 0.44360 $ 129,265.04
AIS 3 0.00000 $ - 0.24085 $ 156,793.35 4 0.00000 $ - 0.03085 $ 50,877.82 5 0.00000 $ - 0.01395 $ 51,288.57 Fatality 1.00000 $ 6,200,000.00 0.00000 $ - SUBTOTALS 1.00 $ 6,200,000.00 5.00 $ 427,042.05
TOTAL VALUE OF FATALITIES & INJURIES $ 6,627,042
TIGER BCA Resource Guide Page 13 of 19
III. Frequently Asked Questions (FAQs)
1. Are all applicants required to submit a benefit-cost analysis with their TIGER application? We are proposing only a small project and have very limited resources to conduct a full benefit-cost analysis.
A Benefit-Cost Analysis (BCA) is required of all applicants. The TIGER team is sensitive to the fact that different applicants have different resource constraints, and that complex forecasts and analyses are not always a cost-effective option. However, given the quality of BCAs received in previous rounds of TIGER from applicants of all sizes, we also believe that a transparent, reproducible, thoughtful and reasonable BCA is possible for all projects. The goal of a well-produced BCA is to provide a more objective assessment of a project, and why a project sponsor has prioritized that specific project over other alternatives and proposals. An Applicant’s evaluative process of assessing benefits and costs can only help to support an already complete application.
2. Where can I find information on how to develop my TIGER application’s benefit-cost analysis?
The final Notice of Funding Availability contains a special appendix (Appendix A: Additional Information on Benefit-Cost Analysis) which provides general information and guidance on conducting a benefit-cost analysis for TIGER grant applications.
In addition to the NOFA Appendix, the Department has previously sponsored several informational sessions with regard to benefit-cost analysis:
• DOT held an eight-hour workshop to offer technical assistance in developing benefit-cost analyses in 2010. That session can be viewed here: http://mediasite.yorkcast.com/webcast/Viewer/?peid=48d006182cf5438680a75b7c6dfc2c9e
• An archive of the 2011 90-minute webinar on TIGER benefit-cost analysis can be found here: http://fhwa.adobeconnect.com/p2evpxuzqrm/?launcher=false&fcsContent=true&pbMode=normal
• The Department also partnered with Smart Growth America to provide assistance for rural communities as they develop benefit-cost analyses. An archive of the 2-hour webinar can be found here: http://www.smartgrowthamerica.org/2011/09/02/tiger-and-rural-america-part-2-webinar- materials-now-online/
3. Please explain Discounting in the Benefit-Cost Analysis section.
The Notice requires discounting future benefits at a real discount rate of 7% following guidance from OMB in Circulars A-4 and A-94 (http://www.whitehouse.gov/omb/circulars/). Applicants should also provide an alternative analysis with a real discount rate of 3%.
TIGER BCA Resource Guide Page 14 of 19 The formula for present discounted value is:
= (1 + ) 퐹푉 Where PV= Present discounted value of a푃푉 future payment푡 from year t 푖 FV = Future Value of payment in year t i = Discount rate applied t = Years in the future for payment (where base year of analysis is t = 0)
An example of the present value formula in action (at the 7% and 3% discount rates) is Columns F and G of the Sample Calculation for Applying Social Cost of Carbon to TIGER Benefit-Cost Analysis spreadsheet provided under Section II.1 of this guide.
4. Could you clarify how the benefit-cost analysis differs from an economic impact analysis?
A benefit-cost analysis measures the dollar value of the benefits and costs to all the members of society. The benefits, for example, are the dollar value of what all the people in society would be willing to pay to have the project built. If people would be willing to pay more than the project actually costs, then the project has positive net benefits (benefits minus costs).
An economic impact analysis, on the other hand, measures “impacts,” which are not the same thing as benefits. Impacts, for example, include the dollar value of all jobs created by a project. While jobs are a good thing, the benefit of a job is not measured by how much we pay the person who has a job, but by the increase in the productivity of that person compared with what the person would have been producing if the project were not funded. Economic impact analysis also generally measures local effects of a project, not overall effects on society as a whole. Some projects create positive effects on one community but negative effects on other communities. The “impacts” simply look at the positive effects, while the benefits consider negative effects as well as positive effects.
5. For TIGER transit project applicants, would it be appropriate to use the cost-effectiveness measure (as calculated under New Starts guidance) instead of calculating travel time savings using the TIGER recommended guidance?
Please note that the value of time (VOT) as referenced in the context of TIGER Grants is an actual value of time – that is, a monetized value assigned to each hour of travel time saved by users of the transportation system. The calculation prescribed by the New Starts process that is commonly referenced as value of travel time savings is actually a Cost-Effectiveness value, a measure of what the value of travel time savings would have to be to equal the level of estimated capital and operating costs. This is essentially more of an adjusted program value – not the actual transportation consumer’s dollar valuation of time saved or lost through use of the transportation system, and therefore we would not recommend the use of this number in the proposed project TIGER BCA.
If you have a cost-effectiveness measure, you should still calculate the VOT as recommended in Section I of this document (“Recommended Monetized Values”). You should take the estimated travel time savings (hours of personal and business travel saved, as referenced in Section I, Table 1, “Value of Travel Time”) from the proposed transit project and multiply by the national hourly values of travel
TIGER BCA Resource Guide Page 15 of 19 time for each type of travel. The dollar value of benefits other than travel time savings directly generated by the project (highway congestion reduction, economic development, environmental, other indirect benefits) should be calculated separately. Please be sure to include clear documentation of assumptions and calculations in your BCA for all calculated benefits and costs.
6. Must costs of externalities created during construction be included in the benefit-cost analysis?
Yes, any external costs incurred during construction phases (especially if that construction phase is lengthy) should be included in the BCA. In general, the calculation of costs for a BCA should not merely be the estimated dollars paid to deliver the project – they should include costs over the entire life cycle of the project (operations and maintenance, scheduled rehabilitation, etc.) as well as external costs (noise, travel time delay, etc.). Appendix A from the January 31, 2012, Notice of Funding Availability (NOFA) addresses these topics specifically under the “Other” section (page 4878). Specifically, the section states that “applicants should include, to the extent possible, costs to users during construction, such as delays and increased vehicle operating costs associated with work zones or detours.”
7. Our proposed TIGER grant transit project would have multiple impacts in our community beyond travel-time savings – specifically on property values, low-income wages, and automobile operating costs. Do you have any specific sources of information regarding these benefits and how our agency may calculate them?
The impacts of transit investment vary depending on geographic location and are largely dependent on the travel demand data generated for the proposed project. The TIGER Team assumes that the sponsoring agency and their technical team have developed the most appropriate model for estimating realistic travel demand changes resulting from the proposed project (and its alternatives) and will use the outcomes of that usership model to estimate the direct and indirect benefits and costs for the analysis. It is important to provide a clear explanation of the underlying assumptions, values, and calculations as part of the transparent documentation of the BCA.
Specifically addressing the topics above:
- Property Values: Change in property value is one of the benefits generally attributed to transit investment. The topic – along with other benefits and costs considered in transit investments – is discussed well within TCRP Report 78: Estimating the Benefits and Costs of Public Transit Projects: A Guidebook for Practitioners (2002).7 Please note that the issue of double-counting is an important consideration when calculating economic development benefits for any proposed project. The TIGER NOFA Appendix discusses economic development benefits on page 4878. It is important, when estimating expected property value increases in one metropolitan area based on actual increases in another area, to make sure that the transit improvements in the two areas are comparable. For example, you should not estimate property value increases for a light rail system in one city based on experience with a heavy rail system in another city.
7 Transportation Research Board – National Research Council, TCRP Report 78 – Estimating the Benefits and Costs of Public Transit Projects: A Guidebook for Practioners (TCRP Report 78), 2002 (http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp78/guidebook/tcrp78.pdf). TIGER BCA Resource Guide Page 16 of 19 - Low-income wages and job creation: A BCA focus on low-income wage earners is relevant when a transportation project can potentially increase the wages of an affected population. In general, wages from project-induced job creation are considered transfer payments and should not be included in a typical benefit-cost analysis. However, the January 31, 2012, TIGER NOFA Appendix (Page 4878) makes the important distinction of increased wages as a reflection of higher labor productivity benefits and leaves its calculation to the discretion of the Applicant. Applicants need to demonstrate rigorously how such productivity benefits are estimated and the exact period of time over which the productivity benefits occur. Simply asserting these gains is inadequate. To this end, Applicants should make sure that productivity benefits from higher-paying jobs are not double- counted with other benefits and are net societal estimates (i.e., the productivity benefits are newly generated and not simply transferred from another jurisdiction).
- Auto operating cost savings: Any savings from private automobile operating costs would presumably be generated from reduced auto traffic estimated by the travel demand model. The TIGER NOFA’s BCA Appendix does not provide a specific value of auto operating cost, but such estimates (on a per mile basis) do exist. The AAA publishes annual data on per-mile driving cost that incorporates costs for fuel, maintenance, tires, insurance, fees (license and registration) and taxes, depreciation, and financing.8
8. Our agency is proposing to construct the Applicant Project either with TIGER grant funding or toll revenues. Would the toll-funded option be considered an “alternative” in the benefit-cost analysis?
Within the context of the TIGER grants, “alternatives” are generally intended to mean projects that significantly differ from the proposed project in technology, alignment/location, design and/or construction schedule. Alternative projects would generate different levels of benefits and costs in the various societal benefit/cost categories such as travel time savings, emissions, safety, life cycle costs, externalities, etc. Financing a project with a TIGER grant versus toll financing is not really an alternative project, though the difference in financing could affect the travel demand on the project and hence affect the benefits. We would consider alternative financing approaches to be a variation within the same basic project.
A benefit-cost analysis is expected to minimally compare the benefits and costs of the proposed project against the most realistic base case (what would be the most likely scenario if the project were not built) and any viable alternatives under consideration. The BCA should demonstrate why the proposed project is better than all other alternatives.
9. For reference, is there an accepted ratio for short-term and long-term job creation as a function of the project costs? This would help establish a starting point for more detailed assessment.
After discussions with the White House Council of Economic Advisers, the USDOT estimates that there are 13,000 short-term job-years created per one billion dollars of government investment (or $76,900 per job-year). Previous guidance had stated that every $92,000 of investment is equivalent to one job-
8 AAA Exchange, “Your Driving Costs”, (http://www.aaaexchange.com/Main/Default.asp?CategoryID=16&SubCategoryID=76&ContentID=353). The 2011 edition of the Your Driving Costs guide is available at http://www.aaaexchange.com/Assets/Files/201145734460.DrivingCosts2011.pdf. TIGER BCA Resource Guide Page 17 of 19 year. These estimates include direct on-site jobs, indirect jobs in supplier industries, and jobs that are induced in consumer goods and services industries as workers with direct and indirect jobs spend their increased incomes. These or any other well-documented and reasonable estimates of short-term job creation would be acceptable values to use. Since all projects create about the same number of short- term jobs per million dollars spent, the most important information about short-term job creation is how quickly these jobs are created, so applicants should provide quarter-by-quarter estimates of the timing of short-term job creation, showing how many jobs they expect to create in each quarter. Long- term job creation will vary greatly depending on the nature of the project, so there are no accepted ratios for long-term job creation. Applicants should attempt to measure the level of long-term economic activity induced by the project, and the level of labor-intensity associated with that economic activity. Analysis of such long-term economic activity and job creation should be estimated on a year- by-year basis. Applicants can share their estimated numbers of jobs produced in the qualitative portions of the application.
While we are interested in the short-term economic impact of job creation caused by a TIGER project, these impacts should not be included in the benefit-cost analysis. The benefit-cost analysis should include only the short- and long-term increases in labor productivity associated with the jobs created by the project. The Notice of Funding Availability reminds applicants that job creation is primarily just a transfer payment – the benefits gained by the employee are costs to the employer, and therefore net benefits are zero. New jobs only yield net benefits if the jobs created actually increase the overall productivity of workers. Applicants should fully understand these distinctions before including job creation effects as part of net benefits.
10. Are there specific worksheets, forms, or formats that are required for the BCA?
There is no “specific worksheet” or format that is required for submittal, but the NOFA Appendix does ask that Applicants “make every effort to make the results of their analyses as transparent and reproducible as possible”. This means that spreadsheets should be accompanied by a narrative describing all of the basic assumptions, methods, and data underlying the analysis – in addition to any narrative text from the BCA and Application themselves. Appendix A also provides a sample of a potential layout of how this information can be presented.
11. We have a project where buses, pedestrians, and bikers cannot go through a tunnel, with no reasonable alternative. Are there standard methods for monetizing these benefits?
When beginning any BCA, it is necessary to think about at least two different scenarios: one in which the proposed project is built and a second scenario in which is described the most realistic scenario if the project is not built (a base case, or “no-build” alternative). If there were an alternative route that buses, pedestrians, and bicycles could take to avoid the tunnel, then the benefits of the project would be the value of the delays avoided by not having to take that alternative route. If there is no alternative route, then it becomes impossible for bus riders, pedestrians, and bicyclists to travel to destinations served by the tunnel, and the benefits are the value to riders of being able to access those destinations. Measuring the dollar value of these accessibility benefits is difficult – they are analytically equal to the toll that bus riders, pedestrians, and bicyclists would be willing to pay to use the tunnel. It may be possible to gather such information through survey data. The bus fare that passengers would be willing
TIGER BCA Resource Guide Page 18 of 19 to pay to access these points is one indicator of the value that passengers place on being able to travel on these routes.
12. Regarding ports and harbors, is it fair to include benefits to the US economy that would be diverted from other nations, say, Canada and Mexico?
Yes. The benefits to be counted are benefits to U.S. residents. Hence, benefits resulting from diversion of port activity to the U.S. can be considered without deducting any costs associated with loss of port activity in Canada or Mexico. Remember, however, that the dollar value of port activity is not a benefit – it is a payment for a service provided, and hence is a transfer payment, not a net benefit. Benefits would include only the cost savings or increases in productivity associated with the port activity created.
13. If a project has already been funded for preliminary design and land purchase from a different funding source, yet is seeking construction funds through this program, would the land purchase and preliminary design be included in the benefit-cost analysis?
Yes. The entire cost of the proposed project (including land purchase, preliminary design, and any other relevant components not funded by TIGER, as well as any indirect costs) must be included in the BCA.
14. Would you explain more about what might be included in agglomeration benefits and what methodologies might be used to estimate them?
Methodologies for determining agglomeration benefits are not yet well-established. It is generally agreed that agglomeration benefits can be significant, but it is also agreed that the significance of these benefits falls as the distance between the points joined by a transportation project increases. Agglomeration benefits are therefore generally more significant within the context of a metropolitan area than they are in an intercity context. In general, the methodology for estimating agglomeration benefits involves examining wage rates and output and productivity levels in locations that are well- connected to other populations, and comparing these measures of income and output to locations that are not well-connected to other populations. This can allow estimation of coefficients that measure the impact of connectedness to incomes and output. A summary of recent literature on agglomeration benefits can be found in Daniel J. Graham, “Agglomeration, Productivity, and Transport Investment,” Journal of Transport Economics and Policy, v. 41, Part 3 (September 2007), pp. 317-343.
TIGER BCA Resource Guide Page 19 of 19 Questions?
Stephen R. Galati, CGW, CP APMP AGWA Field of Interest Chairperson - Homeland Security AGWA Field of Interest Chairperson - Environment
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