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November 22, 2013
AGWA Annual Conference
Developing a Convincing
Benefit- Cost Analysis for Grants
Stephen R. Galati, CGW, CP APMP
Reference Materials
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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
Discussion Agenda
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Stephen R. Galati, CGW, CP APMP
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
Presenter Bio
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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 a Professional Development Certificate in Emergency Management from the FEMA Institute. He currently holds two Field of Interest Chairs for the American Grant Writers Association covering the Environment and Homeland Security, and is a Chemical-Terrorism Vulnerability Information (CVI) Authorized User. 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.
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Further Reading Resources Available BCA Examples
Resources and BCA Examples
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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 TCRP Report 78: Estimating the Benefits and Costs of Public Transit Projects: A Guide for Practitioners http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp78/guidebook/tcrp78.pdf
Further Reading and Resources
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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 San José State University, Department of Economics – An Introduction to Cost Benefit Analysis. http://www.sjsu.edu/faculty/watkins/cba.htm
Further Reading and Resources (continued)
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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 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 http://portcanaveral.com/tigerIV/pdf/Port%20Canaveral%20Benefits%20Cost%20Analysis%20TIGER%204.pdf USDOT - TIGER Benefit-Cost Analysis Examples http://www.dot.gov/sites/dot.dev/files/docs/TIGER-bca-examples-03-06-12.pdf
Available BCA Examples
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Case Study - Benefit Cost Analysis
Massachusetts Bay Transportation Authority (MBTA) Annisquam Railroad Drawbridge Project
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 Net Present Value (NPV)
Grant Selection Criteria Discount Rate 7%
Discount Rate 3%
Travel Time Savings State of Good Repair $38.7 million $40.3 million
Saved Revenue for Maintained Ridership
State of Good Repair, Sustainability
$5.0 million $5.2 million
Layover Facility Construction Savings
State of Good Repair, Livability
$12.0 million $12.5 million
Retained Tourism and Tax Revenue
Sustainability, Livability $1.4 billion $1.5 billion
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, including environmental, permitting, and noise mitigation.
$9,000,000
Real Estate Acquisition $3,900,000
Projected Layover Facility Operations and Maintenance Costs
O&M per Year, including staff, power, security, operations, and maintenance yard.
$1,100,000
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
Line Ridership Year
Weekly
Inbound
Weekly
Outbound
Weekly
Total
Weekly
Factor1
Annual Line
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
Ridership
(per year)
Lost Travel
Time per
Rider
(minutes)
Total Lost
Travel Time
(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 Ridership (per year)
Travel Time Saved per
Rider (minutes)
1
Total Travel Time Saved (minutes)
All Purposes Intercity
Travel Value (per person-
hour) 2
Yearly Travel Time Value
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 over 30 years
10,660,317 138,584,117 $18.00 $41,575,235.10
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 Constructing the Projected Layover Facility
$12,900,000
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 Tourism Revenue
$35,000,000
North Shore / Essex County Tax Revenue
$850,000
Total Retained Revenue per Year
$35,850,000
Total Cost Benefit over 30 years
$1,519,302,952
3% Discount $1,473,723,864
7% Discount $1,412,951,746
Economic Development in the Gloucester-Rockport Area through Private
Investment
It is important to underscore the importance of economic development through the new
drawbridge. A safer and more attractive project area accessible by a continued MBTA
commuter rail service will improve the retailing environment, create opportunities for
higher taxable, higher density housing, and provide a more attractive environment to
office and service industries to create quality jobs in the Rockport-Gloucester area. In
addition to the immediate project area, this replacement project recognizes the potential
community spillover effect that can occur when the most unattractive and unsafe part of
the community is dramatically transformed. Because the economy of the area is driven
largely by commuters and working families, the quality and attractiveness of the area
will have a direct correlation to its competitiveness in the overall marketplace. This is
true particularly as the Gloucester – Rockport region looks to attract new and expanding
jobs and recreation to the community. This benefit, although qualitative in nature, is very
important to the communities impacted by the new drawbridge and the continuation of
the MBTA commuter rail service.
ATTACHMENT #1
BENEFIT COST RATIO ANALYSIS
7% Discount Rate 3% Discount Rate
BENEFITS Millions of 2012$ 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
DISCOUNT SUMMARY SHEET
ATTACHMENT #1
BENEFIT COST RATIO ANALYSIS
Year
Net
Construction
Costs
Net Operations
& Maint. Cost Total Costs
Travel Time
Savings
Saved Revenue
for Maintained
Ridership
Layover Facility
Savings Emissions1Retained Tourism
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 $534,667,7692012 $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
Costs Benefits Present Value
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
7% DISCOUNT CALCULATION SHEET
ATTACHMENT #1
BENEFIT COST RATIO ANALYSIS
Year
Net
Construction
Costs
Net Operations
& Maint. Cost Total Costs
Travel Time
Savings
Saved Revenue
for Maintained
Ridership
Layover Facility
Savings Emissions
Retained Tourism
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 $924,939,4662012 $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 SHEETCosts Benefits Present Value
3% DISCOUNT CALCULATION SHEET
Attachment #2
Year Construction Costs1
Operation and
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
Attachment # 2
"No Replace" Option
Layover Facility Costs
Notes1 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
Year
Total Ridership Lost
from West Gloucester to
Rockport Stations
(per year)1
Lost Revenue
per Ride2
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 # 3
"No Replace" Option
Lost Fare and Ridership
Attachment #4
Year
Retained Ridership
from West Gloucester to
Rockport Stations
(per year)1
Travel Time Saved per
Rider (in minutes)2
Total Travel Time Saved
(in minutes)
All Purposes Intercity
Travel Value (per person-
hour)2
Yearly Travel Time Value
(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
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 # 4
"Replace" Option
Travel Time Savings
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.
ATTACHMENT #5
Year
Total Ridership
Projected
# of trips diverted
from auto1
# of trips
diverted per day2
Trips - Assuming
Round Trip3
Total # of Miles Diverted
per day4
CO2 Emissions
Use/Reduction per day
(metric tons)5
CO2 Emissions
Use/Reduction per year
(metric tons)6
GHG Emissions
Use/Reduction
(metric tons)7
Monetized Value
CO2 emissions
(per metric ton)8
Value of CO2
Emissions
(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
75%
1
0.936%
99.000%
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.
NotesPercent of Rides To/From Auto
Riders per Auto
Projected Ridership Increase per Year
Percent of CO2 emissions in GHG emissions7
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.
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.
4 Each vehicle goes a distance of 6.7 miles each way daily = 13.4 miles
per car daily.
6 Daily CO2 emissions times 365 days.
Attachment # 5: "Replace" Option - CO2 and GHG Emissions Reductions
1 Number of trips diverted to/from automobile travel due2 Diverted trips converted to a daily number. Yearly totals
divided by 365 days3 Conversion to round trips equals # of trips diverted divided by 2
Assumptions
ATTACHMENT #6
Year
Total Revenue Lost
from North Shore / Essex County Regions
(per year)1
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
Notes1 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.
Attachment # 6
"Replace" Option
Benefits to Retained North Shore/Essex County
Tourism and Tax Revenue
10
Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs
OMB Circular A-94
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 Analysisof Federal Programs
Table of Contents Page
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . 12. Rescission . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Authority . . . . . . . . . . . . . . . . . . . . . . . . . 24. Scope . . . . . . . . . . . . . . . . . . . . . . . . . 25. General Principles . . . . . . . . . . . . . . . . . . . . . 3
a. Net Present Value and Related Outcome Measures b. Cost-Effectiveness Analysisc. Elements of Benefit-Cost or Cost-Effectiveness
Analysis6. Identifying and Measuring Benefits and Costs . . . . . . . . 5
a. Identifying Benefits and Costsb. Measuring Benefits and Costs
7. Treatment of Inflation . . . . . . . . . . . . . . . . . . . 6a. Real or Nominal Values b. Recommended Inflation Assumption
8. Discount Rate Policy . . . . . . . . . . . . . . . . . . . . 7a. Real versus Nominal Discount Rates b. Public Investment and Regulatory Analysesc. Cost-Effectiveness, Lease-Purchase, Internal
Government Investment, and Asset Sale Analyses9. Treatment of Uncertainty . . . . . . . . . . . . . . . . . . 10
a. Characterizing Uncertaintyb. Expected Valuesc. Sensitivity Analysisd. Other Adjustments for Uncertainty
10. Incidence and Distributional Effects . . . . . . . . . . . . 11a. Alternative Classifications b. Economic Incidence
11. Special Guidance for Public Investment Analysis . . . . . . 12a. Analysis of Excess Burdensb. Exceptions
12. Special Guidance for Regulatory Impact Analysis . . . . . . 1213. Special Guidance for Lease-Purchase Analysis . . . . . . . . 12
a. Coverageb. Required Justification for Leasesc. Analytical Requirements and Definitions
14. Related Guidance . . . . . . . . . . . . . . . . . . . . . . 1615. Implementation . . . . . . . . . . . . . . . . . . . . . . . 1616. Effective Date . . . . . . . . . . . . . . . . . . . . . . . 16 17. Interpretation . . . . . . . . . . . . . . . . . . . . . . . 16
Appendix A: Definitions of Terms . . . . . . . . . . . . . . . 17Appendix B: Additional Guidance for Discounting . . . . . . . . 20Appendix C: Discount Rates for Cost-Effectiveness, Lease-
Purchase, and Related Analyses . . . . . . . . . 22
1. Purpose. The goal of this Circular is to promote efficient resourceallocation 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 usedin evaluating Federal programs whose benefits and costs are distributed overtime. The general guidance will serve as a checklist of whether an agency hasconsidered and properly dealt with all the elements for sound benefit-cost andcost-effectiveness analyses.
2. Rescission. This Circular replaces and rescinds Office of Management andBudget (OMB) Circular No. A-94, "Discount Rates to Be Used in EvaluatingTime-Distributed Costs and Benefits," dated March 27, 1972, and Circular No.A-104, "Evaluating Leases of Capital Assets," dated June 1, 1986, which has beenrescinded. Lease-purchase analysis is only appropriate after a decision has been made to acquire the services of an asset. Guidance for lease- purchase analysisis 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 areprescribed 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 analysessubmitted to OMB in support of legislative and budget-programs in compliance withOMB 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 withExecutive Order No. 12291, "Federal Regulation," and the President's April 29,1992 memorandum requiring benefit-cost analysis for certain legislativeproposals.
a. Aside from the exceptions listed below, the guidelines in this Circularapply 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 orpolicies.
(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 Economicand Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies).
-3-
(2) The acquisition of commercial-type services by Government orcontractor 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 theFederal Government. It does not apply to the Government of the Districtof Columbia or to non-Federal recipients of loans, contracts or grants.Recipients are encouraged, however, to follow the guidelines provided herewhen preparing analyses in support of Federal activities.
d. For small projects which share similar characteristics, agencies areencouraged to conduct generic studies and to avoid duplication of effortin 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 orprojects. Cost-effectiveness analysis is a less comprehensive technique, but itcan 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 economicprinciples 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, discountingfuture benefits and costs using an appropriate discount rate, andsubtracting 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 ofmeasurement. Programs with positive net present value increase socialresources and are generally preferred. Programs with negative net presentvalue should generally be avoided. (Section 8 considers discounting issuesin more detail.)
Although net present value is not always computable (and it does notusually reflect effects on income distribution), efforts to measure it canproduce 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 andcosts, monetized or not, can be helpful in identifying the fullrange of program effects.
(2) Quantifying benefits and costs is worthwhile, even when it is notfeasible to assign monetary values; physical measurements may bepossible and useful.
Other summary effectiveness measures can provide useful supplementaryinformation to net present value, and analysts are encouraged to reportthem also. Examples include the number of injuries prevented per dollar
-4-
of cost (both measured in present value terms) or a project's internalrate of return.
b. Cost-Effectiveness Analysis. A program is cost-effective if, on the basisof life cycle cost analysis of competing alternatives, it is determined to have the lowest costs expressed in present value terms for a given amountof benefits. Cost-effectiveness analysis is appropriate whenever it isunnecessary or impractical to consider the dollar value of the benefitsprovided by the alternatives under consideration. This is the case whenever (i) each alternative has the same annual benefits expressed inmonetary terms; or (ii) each alternative has the same annual affects, butdollar values cannot be assigned to their benefits. Analysis ofalternative defense systems often falls in this category.
Cost-effectiveness analysis can also be used to compare programs withidentical costs but differing benefits. In this case, the decisioncriterion 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 beingexamined 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 justifiedwhere they improve the efficiency of the Government's internaloperations, such as cost-saving investments.
(2) Explicit Assumptions. Analyses should be explicit about theunderlying assumptions used to arrive at estimates of futurebenefits and costs. In the case of public health programs, for example, it may be necessary to make assumptions about the number offuture beneficiaries, the intensity of service, and the rate ofincrease in medical prices. The analysis should include a statementof the assumptions, the rationale behind them, and a review of theirstrengths 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 examiningdifferent program scales, different methods of provision, anddifferent 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 existinggovernment property; or (iv) leasing or contracting for services.
(4) Verification. Retrospective studies to determine whether anticipated benefits and costs have been realized are potentiallyvaluable. Such studies can be used to determine necessarycorrections in existing programs, and to improve future estimates ofbenefits 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 theresults of relevant evaluation studies when proposingreauthorizations or increased program funding.
6. Identifying and Measuring Benefits and Costs. Analyses should includecomprehensive 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, shouldbe the basis for evaluating government programs or policies that have effects onprivate citizens or other levels of government. Social benefits and costs can differ from private benefits and costs as measured in the marketplace because ofimperfections arising from: (i) external economies or diseconomies where actions by one party impose benefits or costs on other groups that are not compensatedin the market place; (ii) monopoly power that distorts the relationship betweenmarginal costs and market prices; and (iii) taxes or subsidies.
a. Identifying Benefits and Costs. Both intangible and tangible benefits andcosts should be recognized. The relevant cost concept is broader thanprivate-sector production and compliance costs or government cashexpenditures. Costs should reflect the opportunity cost of any resourcesused, measured by the return to those resources in their most productiveapplication elsewhere. Below are some guidelines to consider whenidentifying benefits and costs.
(1) Incremental Benefits and Costs. Calculation of net present valueshould be based on incremental benefits and costs. Sunk costs and realized benefits should be ignored. Past experience is relevantonly in helping to estimate what the value of future benefits andcosts might be. Analyses should take particular care to identifythe 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 beexplicitly 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 beconsidered. For example, policies affecting agricultural outputshould 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 netpresent value. Where programs or projects have effects outside theUnited 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 presentvalue. Transfers that arise as a result of the program or projectbeing analyzed should be identified as such, however, and theirdistributional effects discussed. It should also be recognized that
-6-
a transfer program may have benefits that are less than theprogram's real economic costs due to inefficiencies that can arisein 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 startingpoint 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 netloss to society. (The appropriate method for recognizing this excessburden 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 valuingbenefits 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 bewilling to pay more than the market price rather than go entirelywithout 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 ofthe total benefit to society from a government program or project.Consumer surplus can sometimes be calculated by using econometricmethods to estimate consumer demand.
(2) Indirect Measures of Benefits and Costs. Willingness-to-pay cansometimes 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 andshould be replicable.
(3) Multiplier Effects. Generally, analyses should treat resources asif they were likely to be fully employed. Employment or outputmultipliers that purport to measure the secondary effects ofgovernment expenditures on employment and output should not beincluded in measured social benefits or costs.
7. Treatment of Inflation. Future inflation is highly uncertain. Analystsshould avoid having to make an assumption about the general rate of inflation whenever possible.
a. Real or Nominal Values. Economic analyses are often most readilyaccomplished using real or constant-dollar values, i.e., by measuringbenefits and costs in units of stable purchasing power. (Such estimatesmay reflect expected future changes in relative prices, however, wherethere 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, inthe 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 constantdollars or in terms of nominal values. This may require converting somenominal 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 fromthe Administration's economic assumptions for the period of the analysisis recommended. For projects or programs that extend beyond the six-yearbudget horizon, the inflation assumption can be extended by using theinflation 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 theMid-Session Review of the Budget in July. Alternative inflation estimates, based on credible private sector forecasts, may be used forsensitivity analysis.
8. Discount Rate Policy. In order to compute net present value, it isnecessary to discount future benefits and costs. This discounting reflects thetime value of money. Benefits and costs are worth more if they are experienced sooner. All future benefits and costs, including nonmonetized benefits andcosts, should be discounted. The higher the discount rate, the lower is thepresent value of future cash flows. For typical investments, with costsconcentrated in early periods and benefits following in later periods, raisingthe 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 effectof expected inflation should be used to discount constant-dollar or real benefits and costs. A real discount rate can be approximatedby subtracting expected inflation from a nominal interest rate.
(2) A nominal discount rate that reflects expected inflation should beused 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 sectionapplies to benefit-cost analyses of public investments and regulatoryprograms that provide benefits and costs to the general public. Guidance related to cost-effectiveness analysis of internal planning decisions ofthe Federal Government is provided in Section 8.c.
In general, public investments and regulations displace both privateinvestment and consumption. To account for this displacement and topromote efficient investment and regulatory policies, the followingguidance 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 7percent. This rate approximates the marginal pretax rate of returnon an average investment in the private sector in recent years.Significant changes in this rate will be reflected in future updatesof this Circular.
(2) Other Discount Rates. Analyses should show the sensitivity of thediscounted net present value and other outcomes to variations in thediscount rate. The importance of these alternative calculations will depend on the specific economic characteristics of the programunder analysis. For example, in analyzing a regulatory proposalwhose main cost is to reduce business investment, net present valueshould also be calculated using a higher discount rate than 7percent.
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 valueof 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 areconstrained or there is uncertainty about the appropriate discountrate.
(3) Using the shadow price of capital to value benefits and costs is the analytically preferred means of capturing the effects of governmentprojects on resource allocation in the private sector. To use this method accurately, the analyst must be able to compute how thebenefits 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, andAsset 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-dollarcosts should use the real Treasury borrowing rate on marketablesecurities 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 firstyear of the budget forecast is presented in Appendix C of thisCircular. Appendix C is updated annually and is available uponrequest from OMB. Real Treasury rates are obtained by removingexpected inflation over the period of analysis from nominal Treasuryinterest rates. (Analyses that involve nominal costs should use nominal Treasury rates for discounting, as described in thefollowing 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 realTreasury 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 aninvestment in an energy-efficient building system that reducesFederal operating costs. Unlike the case of a Federally fundedhighway (which provides "external" benefits to society as a whole),it is appropriate to calculate such a project's net present valueusing a comparable-maturity Treasury rate as a discount rate. The rate used may be either nominal or real, depending on how benefitsand costs are measured.
Some Federal activities provide a mix of both Federal cost savingsand external social benefits. For example, Federal investments ininformation 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 suchinvestments should be evaluated with the 7 percent real discountrate discussed in Section 8.b. unless the analysis is able toallocate the investment's costs between provision of Federal costsavings 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 socialbenefits and their associated investment costs should be discounted at the 7 percent real rate.
(4) Asset Sale Analysis. Analysis of possible asset sales shouldreflect the following:
(a) The net present value to the Federal Government of holding an asset is best measured by discounting its future earningsstream using a Treasury rate. The rate used may be eithernominal or real, depending on how earnings are measured.
(b) Analyses of government asset values should explicitly deductthe cost of expected defaults or delays in payment fromprojected cash flows, along with government administrative costs. Such analyses should also consider explicitly theprobabilities of events that would cause the asset to becomenonfunctional, impaired or obsolete, as well as probabilitiesof events that would increase asset value.
(c) Analyses of possible asset sales should assess the gain insocial efficiency that can result when a government asset issubject to market discipline and private incentives. Even though a government asset may be used more efficiently in theprivate sector, potential private-sector purchasers willgenerally discount such an asset's earnings at a rate inexcess of the Treasury rate, in part, due to the cost of bearing risk. When there is evidence that government assetscan be used more efficiently in the private sector, valuation
-10-
analyses for these assets should include sensitivitycomparisons that discount the returns from such assets with the rate of interest earned by assets of similar riskiness inthe private sector.
9. Treatment of Uncertainty. Estimates of benefits and costs are typicallyuncertain because of imprecision in both underlying data and modelingassumptions. Because such uncertainty is basic to many analyses, its effectsshould be analyzed and reported. Useful information in such a report wouldinclude the key sources of uncertainty; expected value estimates of outcomes; thesensitivity 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 thesources 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 deterministicor 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 ratedifferentials, may be useful in identifying and estimating relevant risks.Stochastic simulation methods can be useful for analyzing such phenomenaand developing insights into the relevant probability distributions. In any case, the basis for the probability distribution assumptions should bereported. Any limitations of the analysis because of uncertainty orbiases 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 itsprobability of occurrence, and then summing across all potential outcomes.If estimated benefits, costs and net benefits are characterized by pointestimates rather than as probability distributions, the expected value (anunbiased 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 analysisshould identify the nature and magnitude of any bias. For example,studies of past activities have documented tendencies for cost growthbeyond initial expectations; analyses should consider whether past experience suggests that initial estimates of benefits or costs areoptimistic.
c. Sensitivity Analysis. Major assumptions should be varied and net presentvalue and other outcomes recomputed to determine how sensitive outcomes are to changes in the assumptions. The assumptions that deserve the mostattention 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 thenumber of beneficiaries, future wage growth, inflation, and the discountrate. In general, sensitivity analysis should be considered for estimatesof: (i) benefits and costs; (ii) the discount rate; (iii) the generalinflation rate; and (iv) distributional assumptions. Models used in the
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analysis should be well documented and, where possible, available tofacilitate independent review.
d. Other Adjustments for Uncertainty. The absolute variability of a riskyoutcome can be much less significant than its correlation with othersignificant 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 particularprojects. In some cases, it may be possible to estimate certainty-equivalents which involve adjusting uncertain expected values toaccount for risk.
10. Incidence and Distributional Effects. The principle of maximizing netpresent value of benefits is based on the premise that gainers could fullycompensate the losers and still be better off. The presence or absence of suchcompensation 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 usuallybe the case for cost-effectiveness analysis where the scope of governmentactivity is not changing.)
a. Alternative Classification. Distributional effects may be analyzed bygrouping individuals or households according to income class (e.g., incomequintiles), geographical region, or demographic group (e.g., age). Other classifications, such as by industry or occupation, may be appropriate insome circumstances.
Analysis should aim at identifying the relevant gainers and losers frompolicy decisions. Effects on the preexisting assignment of propertyrights by the program under analysis should be reported. Where a policyis intended to benefit a specified subgroup of the population, such as thepoor, the analysis should consider how effective the policy is in reachingits targeted group.
b. Economic Incidence. Individuals or households are the ultimate recipientsof income; business enterprises are merely intermediaries. Analyses ofdistribution should identify economic incidence, or how costs and benefitsare 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 incomesof the commodity's suppliers, but it can also benefit consumers of thecommodity through lower prices and reduce the incomes for suppliers ofcompeting products. A subsidy also raises the value of specializedresources 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 topublic 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
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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 dollarof revenue.
a. Analysis of Excess Burdens. The presentation of results for publicinvestments that are not justified on cost-saving grounds should includea supplementary analysis with a 25 percent excess burden. Thus, in suchanalyses, costs in the form of public expenditures should be multiplied bya factor of 1.25 and net present value recomputed.
b. Exceptions. Where specific information clearly suggests that the excessburden is lower (or higher) than 25 percent, analyses may use a differentfigure. 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 excessburden would be zero. Another example would be a project that providesboth cost savings to the Federal Government and external social benefits.If it is possible to make a quantitative determination of the portion ofthis project's costs that give rise to Federal savings, that portion ofthe costs may be exempted from multiplication by the factor of 1.25.
12. Special Guidance for Regulatory Impact Analysis. Additional guidance foranalysis of regulatory policies is provided in Regulatory Program of the UnitedStates Government which is published annually by OMB. (See "Regulatory ImpactAnalysis Guidance," Appendix V of Regulatory Program of the United StatesGovernment for April 1, 1991 to March 31, 1992.)
13. Special Guidance for Lease-Purchase Analysis. The special guidance inthis 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 isthere a need to analyze the decision whether to lease or purchase.
a. Coverage. The Circular applies only when both of the following tests ofapplicability 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, andleased to the Federal Government for a term of 75 percent ormore of the economic life of the asset; or,
(c) Is built for the express purpose of being leased to theFederal Government; or,
(d) Is leased to the Federal Government and clearly has no alternative commercial use (e.g., a special- purpose government installation).
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(2) The lease-purchase analysis concerns a capital asset or a group ofrelated assets whose total fair market value exceeds $1 million.
b. Required Justification for Leases. All leases of capital assets must bejustified 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 onlyacceptable method for major acquisitions. A lease represents amajor 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 suchgeneric analysis.
(3) By adopting a formal policy for smaller leases and submitting thatpolicy to the OMB for approval. Following such a policy shouldgenerally result in the same lease- purchase decisions as would conducting separate lease- purchase analyses. Before adopting thepolicy, it should be demonstrated that:
(a) The leases in question would generally result in substantialsavings to the Government that could not be realized on apurchase;
(b) The leases are so small or so short-term as to make separatelease-purchase analysis impractical; and
(c) Leases of different types are scored consistently with theinstructions 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 isleast expensive for the Government as a whole.
(1) Life-Cycle Cost. Lease-purchase analyses should compare the netdiscounted present value of the life-cycle cost of leasing with thefull costs of buying or constructing an identical asset. The full costs of buying include the asset's purchase price plus the netdiscounted present value of any relevant ancillary servicesconnected with the purchase. (Guidance on the discount rate to usefor lease-purchase analysis is in Section 8.c.)
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(2) Economic Life. For purposes of lease-purchase analysis, theeconomic 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 oflease-purchase analysis is its fair market value, defined as theprice a willing buyer could reasonably expect to pay a willingseller in a competitive market to acquire the asset.
(a) In the case of property that is already owned by the FederalGovernment or that has been donated or acquired bycondemnation, an imputed purchase price should be estimated.(Guidance on making imputations is provided in Section13.c.(6).)
(b) If public land is used for the site of the asset, the imputedmarket value of the land should be added to the purchaseprice.
(c) The asset's estimated residual value, as of the end of theperiod of analysis, should be subtracted from its purchaseprice. (Guidance on estimating residual value is provided inSection 13.c.(7).)
(4) Taxes. In analyzing the cost of a lease, the normal payment oftaxes 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 specialtax benefits, if any, associated with the lease should be added tothe cost of the lease. Examples of such tax benefits might includehighly accelerated depreciation allowances or tax-free financing.
(5) Ancillary Services. If the terms of the lease include ancillaryservices provided by the lessor, the present value of the cost ofobtaining these services separately should be added to the purchaseprice. Such costs may be excluded if they are estimated to be thesame for both lease and purchase alternatives or too small to affectthe comparison. Examples of ancillary services include:
(a) All costs associated with acquiring the property and preparingit 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 leasepayments).
(d) Imputed property taxes (excluding foreign property taxes onoverseas acquisitions except where actually paid). The imputed taxes approximate the costs of providing municipalservices such as water, sewage, and police and fire protection. (See Section (6) below.)
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(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 thatis already owned by the Federal Government or which has beenacquired 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 valueof any Federal land used as a site for the asset.
(b) Property Taxes. Imputed property taxes may be estimated intwo 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 changesin tax rates or assessed values, the first-year tax rateand assessed value (inflation adjusted for each subsequent year) can be applied to all years. Multiplythe 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 fromthe Building Owners and Managers Association's RegionalExchange Reports. Multiply the fair market value of thegovernment-owned property (inflation adjusted for eachyear) by the effective tax rate.
(c) Insurance Premiums. Determine local estimates of standard commercial coverage for similar property from the BuildingOwners and Managers Association's Regional Exchange Reports.
(7) Residual Value. A property's residual value is an estimate of theprice that the property could be sold for at the end of the periodof 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 sellingfor 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 propertiesdetermined 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.
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14. Related Guidance.
a. OMB Circular No. A-11, "Preparation and Submission of Annual BudgetEstimates."
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, January25, 1990, and Vol. 55, No. 224, November 20, 1990.
k. Presidential Memorandum of April 29, 1992, "Benefits and Costs ofLegislative Proposals."
15. Implementation. Economic analyses submitted to OMB will bereviewed for conformity with Items 5 to 13 in this Circular, through the CircularNo. 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 andBudget (202-395-5873) or, in the case of regulatory issues and analysis, to the Office of Information and Regulatory Affairs (202-395-4852).
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APPENDIX A
DEFINITION OF TERMS
Benefit-Cost Analysis -- A systematic quantitative method of assessing thedesirability of government projects or policies when it is important to take along 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 individualvalues 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 a50-50 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 costsof alternative means of achieving the same stream of benefits or a givenobjective.
Consumer Surplus -- The maximum sum of money a consumer would be willing to payto 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 linein a diagram representing the consumer's demand for the good as a function of itsprice.
Discount Rate -- The interest rate used in calculating the present value ofexpected yearly benefits and costs.
Discount Factor -- The factor that translates expected benefits or costs in anygiven 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 effectof taxes are called excess burdens because they disadvantage society withoutadding to Treasury receipts. This concept is also sometimes referred to asdeadweight 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 orfirm's activity. Also referred to as neighborhood or spillover effects, or externalities for short.
Incidence -- The ultimate distributional effect of a tax, expenditure, orregulatory program.
Inflation -- The proportionate rate of change in the general price level, asopposed to the proportionate increase in a specific price. Inflation is usually
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measured by a broad-based price index, such as the implicit deflator for GrossDomestic 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 havemultiple values when the stream of net benefits alternates from negative topositive more than once.
Life Cycle Cost -- The overall estimated cost for a particular programalternative over the time period corresponding to the life of the program,including direct and indirect initial costs plus any periodic or continuing costsof 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 involuntaryunemployment.
Net Present Value -- The difference between the discounted present value ofbenefits and the discounted present value of costs.
Nominal Values -- Economic units measured in terms of purchasing power of thedate in question. A nominal value reflects the effects of general priceinflation.
Nominal Interest Rate -- An interest rate that is not adjusted to remove theeffects of actual or expected inflation. Market interest rates are generallynominal interest rates.
Opportunity Cost -- The maximum worth of a good or input among possiblealternative 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 PriceIndex.
Real Interest Rate -- An interest rate that has been adjusted to remove theeffect of expected or actual inflation. Real interest rates can be approximatedby 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 subtractingone from the resulting quotient.)
Relative Price -- A price ratio between two goods as, for example, the ratio ofthe price of energy to the price of equipment.
Shadow Price -- An estimate of what the price of a good or input would be in theabsence 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.
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Sunk Cost -- A cost incurred in the past that will not be affected by any presentor future decision. Sunk costs should be ignored in determining whether a newinvestment is worthwhile.
Transfer Payment -- A payment of money or goods. A pure transfer is unrelatedto the provision of any goods or services in exchange. Such payments alter the distribution of income, but do not directly affect the allocation of resourceson 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 giveup in order to secure a change in the provision of a good or service.
1
2
3
4
5
6
7
8
9
10
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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 iscalculated by multiplying column (3) by column (4). The present values of costsand 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)
$10.00 $ 0.00 0.9346 $ 9.35 $ 0.00
20.00 0.00 0.8734 17.47 0.00
30.00 5.00 0.8163 24.49 4.08
30.00 10.00 0.7629 22.89 7.63
20.00 30.00 0.7130 14.26 21.39
10.00 40.00 0.6663 6.66 26.65
5.00 40.00 0.6227 3.11 24.91
5.00 40.00 0.5820 2.91 23.28
5.00 40.00 0.5439 2.72 21.76
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, thedifference 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 implicitassumption 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
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
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after six months, rather than at the end of one year to approximate better asteady 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 toapproximate 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 (thesquare root of 1.07). Thus, if the above example were converted to a mid-yearbasis, 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 Initiation,Renewal or
Year-end Discount
Mid-yearDiscount
Expansion Factors Factors
0.9346 0.9667 0.8734 0.9035 0.8163 0.8444 0.7629 0.7891 0.7130 0.7375 0.6663 0.6893 0.6227 0.6442 0.5820 0.6020 0.5439 0.5626 0.5083 0.5258 0.4751 0.4914 0.4440 0.4593 0.4150 0.4292 0.3878 0.4012 0.3624 0.3749 0.3387 0.3504 0.3166 0.3275 0.2959 0.3060 0.2765 0.2860 0.2584 0.2673 0.2415 0.2498 0.2257 0.2335 0.2109 0.2182 0.1971 0.2039 0.1842 0.1906 0.1722 0.1781 0.1609 0.1665 0.1504 0.1556 0.1406 0.1454 0.1314 0.1359
Beginning-of-yearDiscount Factors
1.0000 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227 0.5820 0.5439 0.5083 0.4751 0.4440 0.4150 0.3878 0.3624 0.3387 0.3166 0.2959 0.2765 0.2584 0.2415 0.2257 0.2109 0.1971 0.1842 0.1722 0.1609 0.1504 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
11
Benefit-Cost Analysis (BCA) Resource Guide
USDOT TIGER Grant Resource
TIGER BCA Resource Guide Page 1 of 19
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 2 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 (VSL)
$6,200,000 per fatality ($2011) Treatment of the Economic Value of a Statistical Life in Departmental Analyses (2008 revised guidance and 2011 update) http://ostpxweb.dot.gov/policy/reports.htm
Value of Injuries
AIS Level Severity Fraction of VSL Unit value ($2011)
AIS 1 Minor 0.003 $ 18,600
AIS 2 Moderate 0.047 $ 291,400
AIS 3 Serious 0.105 $ 651,000
AIS 4 Severe 0.266 $ 1,649,200
AIS 5 Critical 0.593 $ 3,676,600
AIS 6 Unsurvivable 1.000 $ 6,200,000
Treatment of the Economic Value of a Statistical Life in Departmental Analyses (2008 revised guidance and 2011 update) http://ostpxweb.dot.gov/policy/reports.htm
NOTE: Accident data (particularly those provided through law enforcement records) are typically reported as a single number (e.g. “X number of 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”).
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Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Property Damage Only (PDO) Crashes
$3,285 per vehicle crash ($2010) The Economic Impact of Motor Vehicle Crashes 2000 http://www.nhtsa.gov/DOT/NHTSA/Communication%20&%20Consumer%20Information/Articles/Associated%20Files/EconomicImpact2000.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”).
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Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Value of Travel Time Recommended Hourly Values of Travel Time Savings
(2009 U.S. $ per person-hour)
Category Surface Modes*
(except High-Speed Rail) Air and
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.
Revised Departmental Guidance on Valuation of Travel Time in Economic Analysis (Revision 2 – corrected) http://ostpxweb.dot.gov/policy/reports.htm
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Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Value of Emissions
Emission Type $ / long ton
($2007) $ / metric ton
($2007) Carbon dioxide (CO2) (varies)* (varies)*
Volatile Organic Compounds (VOCs) $1,300 $1,280
Nitrogen oxides (NOx) $5,300 $5,217
Particulate matter (PM) $290,000 $285,469
Sulfur dioxide (SOx) $31,000 $30,516
* See “Social Cost of Carbon (3%)” values below.
Corporate Average Fuel Economy for MY2012-MY2016 Passenger Cars and Light Trucks (March 2010), page 403, Table VIII-8, "Economic Values for Benefits Computations (2007 Dollars)" http://www.nhtsa.gov/staticfiles/rulemaking/pdf/cafe/CAFE_2012-2016_FRIA_04012010.pdf
NOTE: Emissions units are commonly reported as “tons”, but there is a distinction between long tons and metric tons. In fact, only carbon dioxide emissions (as reported in the SCC guidance) are typically reported in metric tons, whereas emissions for VOCs, NOx, PMs, and SOx are measured in English (or “long”) tons. A metric ton is 2,205 lbs, and a long ton is 2,240 lbs – resulting in a difference of about 1.6% between the monetized values per metric vs long ton.
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Cost/Benefit Category Recommended Monetized Value(s) Reference and Notes
Social Cost of Carbon (3%)
Year 3% SCC (2007$)
2010 21.40 2011 21.90 2012 22.40 2013 22.80 2014 23.30 2015 23.80 2016 24.30 2017 24.80 2018 25.30 2019 25.80 2020 26.30 2021 27.00 2022 27.60 2023 28.30 2024 28.90 2025 29.60 2026 30.20 2027 30.90 2028 31.50 2029 32.10 2030 32.80
Year 3% SCC (2007$)
2031 33.40 2032 34.10 2033 34.70 2034 35.40 2035 36.00 2036 36.70 2037 37.30 2038 37.90 2039 38.60 2040 39.20 2041 39.80 2042 40.40 2043 40.90 2044 41.50 2045 42.10 2046 42.60 2047 43.20 2048 43.80 2049 44.40 2050 44.90
Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (February 2010), page 39, Table A-1 “Annual SCC Values 2010-2050 (in 2007 dollars)” http://www.epa.gov/oms/climate/regulations/scc-tsd.pdf
NOTE: - SCC values are per unit metric ton of carbon dioxide and already discounted forward to the reference year (in 2007 nominal dollars).
- See Part II, Section 1 (“Clarification on the Social Cost of Carbon (SCC) Guidance and the Annual SCC Values”), for methodology of how to use 3% SCC values in TIGER BCA.
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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
𝑃𝑉 =𝐹𝑉
(1 + 𝑖)𝑡
Where PV= Present discounted value of a future payment from year t 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).
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a. Example: Add $2076.10 to the non-Carbon net benefits (discounted at 7% and 3%) for year 2020 to get the total NPV benefits for year 2020.
The spreadsheet on the following page demonstrates what the methodology would look like for a sample multi-year analysis.
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Table 2. Sample Calculation for Applying Social Cost of Carbon to TIGER Benefit-Cost Analysis
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M)
Year Calendar
Year
Non-CO2 Benefits (2007$)
Non-CO2 Costs
(2007$)
Net non-CO2 Benefts [C+D]
7% NPV Non-CO2 Benefits [E/(1.07^A)]
3% NPV Non-CO2 Benefits [E/(1.03^A)]
CO2 Reduced (Metric Tons)
3% SCC (2007$)
Undiscounted CO2 Costs @ 3% Avg SCC
[H*I]
NPV CO2 Costs @ 3%
Avg SCC [J/(1.03^A)]
7% NPV Total Benefits
[F+K]
3% NPV Total Benefits
[G+K]
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
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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).
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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
(KABCO or # Accidents Reported)
Reported Accidents (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 Reported
Unknown if Injured
6 Unsurvivable
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”.
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Table 4. KABCO/Unknown – AIS Data Conversion Matrix
(1) (2) (3) (4) (5) (6) (7) (8)
O C B A K U# Non-fatal Accidents
No injury Possible InjuryNon-
incapacitatingIncapacitating Killed
Injured Severity Unknown
Unknown if 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
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.
AIS
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
AIS Level"O"
Distribution of AIS Level
Recommended Unit Value
Unit Value of "O"
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.
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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
No injury Possible Injury Non-incapacitating Incapacitating KilledInjured
Severity UnknownAccident Countsby KABCO Level
15$ Value
[Pr(AISx)*Value(AISx)]5
$ Value[Pr(AISx)*Value(AISx)]
5$ Value
[Pr(AISx)*Value(AISx)]3
$ Value[Pr(AISx)*Value(AISx)]
2$ Value
[Pr(AISx)*Value(AISx)]2
$ Value[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 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$
AIS
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
Accident Counts 1$ Value
Fatalities * VSL5
$ Value[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 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$
AIS
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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%.
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The formula for present discounted value is:
𝑃𝑉 =𝐹𝑉
(1 + 𝑖)𝑡
Where PV= Present discounted value of a future payment from year t 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
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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).
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- 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.
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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
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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.
Questions?
Stephen R. Galati, CGW, CP APMP AGWA Field of Interest Chairperson - Homeland Security AGWA Field of Interest Chairperson - Environment
P: 207.620.3874 | E: [email protected] C: 207.485.1901 | E: [email protected] www.agwa.us www.trcsolutions.com
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