0:'circular a94 guidelines and discount rates for benefitcost analysis of federal programs circular no. a94 transmittal memo no.64 memorandum for',
1:'heads of executive departments and establishments subject: guidelines and discount rates for benefitcost analysis of federal programs table of contents',
2:'page 1. purpose 1 2. rescission 2 3. authority 2 4. scope 2 5. general principles 3 a. net present',
3:'value and related outcome measures b. costeffectiveness analysis c. elements of benefitcost or costeffectiveness analysis 6. identifying and measuring benefits',
4:'and costs 5 a. identifying benefits and costs b. measuring benefits and costs 7. treatment of inflation 6 a. real',
5:'or nominal values b. recommended inflation assumption 8. discount rate policy 7 a. real versus nominal discount rates b. public',
6:'investment and regulatory analyses c. costeffectiveness, leasepurchase, internal government investment, and asset sale analyses 9. treatment of uncertainty 10 a.',
7:'characterizing uncertainty b. expected values c. sensitivity analysis d. other adjustments for uncertainty 10. incidence and distributional effects 11 a.',
8:'alternative classifications b. economic incidence 11. special guidance for public investment analysis 12 a. analysis of excess burdens b. exceptions',
9:'12. special guidance for regulatory impact analysis 12 13. special guidance for leasepurchase analysis 12 a. coverage b. required justification',
10:'for leases c. analytical requirements and definitions 14. related guidance 16 15. implementation 16 16. effective date 16 17. interpretation',
11:'16 appendix a: definitions of terms 17 appendix b: additional guidance for discounting 20 appendix c: discount rates for costeffectiveness,',
12:'lease purchase, and related analyses 22 1. purpose. the goal of this circular is to promote efficient resource allocation through',
13:'wellinformed decisionmaking by the federal government. it provides general guidance for conducting benefitcost and costeffectiveness analyses. it also provides specific',
14:'guidance on the discount rates to be used in evaluating federal programs whose benefits and costs are distributed over time.',
15:'the general guidance will serve as a checklist of whether an agency has considered and properly dealt with all the',
16:'elements for sound benefitcost and costeffectiveness analyses. 2. rescission. this circular replaces and rescinds office of management and budget omb',
17:'circular no. a94, discount rates to be used in evaluating timedistributed costs and benefits, dated march 27, 1972, and circular',
18:'no. a104, evaluating leases of capital assets, dated june 1, 1986, which has been rescinded. leasepurchase analysis is only appropriate',
19:'after a decision has been made to acquire the services of an asset. guidance for lease purchase analysis is provided',
20:'in section 8.c.2 and section 13. 3. authority. this circular is issued under the authority of 31 u.s.c. section 1111',
21:'and the budget and accounting act of 1921, as amended. 4. scope. this circular does not supersede agency practices which',
22:'are prescribed by or pursuant to law, executive order, or other relevant circulars. the circulars guidelines are suggested for use',
23:'in the internal planning of executive branch agencies. the guidelines must be followed in all analyses submitted to omb in',
24:'support of legislative and budgetprograms in compliance with omb circulars no. a11, preparation and submission of annual budget estimates, and',
25:'no. a19, legislative coordination and clearance. these guidelines must also be followed in providing estimates submitted to omb in compliance',
26:'with executive order no. 12291, federal regulation, and the presidents april 29, 1992 memorandum requiring benefitcost analysis for certain legislative',
27:'proposals. a. aside from the exceptions listed below, the guidelines in this circular apply to any analysis used to support',
28:'government decisions to initiate, renew, or expand programs or projects which would result in a series of measurable benefits or',
29:'costs extending for three or more years into the future. the circular applies specifically to: 1 benefitcost or costeffectiveness analysis',
30:'of federal programs or policies. 2 regulatory impact analysis. 3 analysis of decisions whether to lease or purchase. 4 asset',
31:'valuation and sale analysis. b. specifically exempted from the scope of this circular are decisions concerning: 1 water resource projects',
32:'guidance for which is the approved economic and environmental principles and guidelines for water and related land resources implementation studies.',
33:'2 the acquisition of commercialtype services by government or contractor operation guidance for which is omb circular no. a76. 3',
34:'federal energy management programs guidance for which can be found in the federal register of january 25, 1990, and november',
35:'20, 1990. c. this circular applies to all agencies of the executive branch of the federal government. it does not',
36:'apply to the government of the district of columbia or to nonfederal recipients of loans, contracts or grants. recipients are',
37:'encouraged, however, to follow the guidelines provided here when preparing analyses in support of federal activities. d. for small projects',
38:'which share similar characteristics, agencies are encouraged to conduct generic studies and to avoid duplication of effort in carrying out',
39:'economic analysis. 5. general principles. benefitcost analysis is recommended as the technique to use in a formal economic analysis of',
40:'government programs or projects. costeffectiveness analysis is a less comprehensive technique, but it can be appropriate when the benefits from',
41:'competing alternatives are the same or where a policy decision has been made that the benefits must be provided. appendix',
42:'a provides a glossary of technical terms used in this circular; technical terms are italicized when they first appear. a.',
43:'net present value and related outcome measures,. the standard criterion for deciding whether a government program can be justified on',
44:'economic principles is net present value the discounted monetized value of expected net benefits i.e., benefits minus costs. net present',
45:'value is computed by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount',
46:'rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. discounting benefits and costs',
47:'transforms gains and losses occurring in different time periods to a common unit of measurement. programs with positive net present',
48:'value increase social resources and are generally preferred. programs with negative net present value should generally be avoided. section 8',
49:'considers discounting issues in more detail. although net present value is not always computable and it does not usually reflect',
50:'effects on income distribution, efforts to measure it can produce useful insights even when the monetary values of some benefits',
51:'or costs cannot be determined. in these cases: 1 a comprehensive enumeration of the different types of benefits and costs,',
52:'monetized or not, can be helpful in identifying the full range of program effects. 2 quantifying benefits and costs is',
53:'worthwhile, even when it is not feasible to assign monetary values; physical measurements may be possible and useful. other summary',
54:'effectiveness measures can provide useful supplementary information to net present value, and analysts are encouraged to report them also. examples',
55:'include the number of injuries prevented per dollar of cost both measured in present value terms or a projects internal',
56:'rate of return. b. costeffectiveness analysis. a program is costeffective if, on the basis of life cycle cost analysis of',
57:'competing alternatives, it is determined to have the lowest costs expressed in present value terms for a given amount of',
58:'benefits. costeffectiveness analysis is appropriate whenever it is unnecessary or impractical to consider the dollar value of the benefits provided',
59:'by the alternatives under consideration. this is the case whenever i each alternative has the same annual benefits expressed in',
60:'monetary terms; or ii each alternative has the same annual affects, but dollar values cannot be assigned to their benefits.',
61:'analysis of alternative defense systems often falls in this category. costeffectiveness analysis can also be used to compare programs with',
62:'identical costs but differing benefits. in this case, the decision criterion is the discounted present value of benefits. the alternative',
63:'program with the largest benefits would normally be favored. c. elements of benefitcost or costeffectiveness analysis. 1 policy rationale. the',
64:'rationale for the government program being examined should be clearly stated in the analysis. programs may be justified on efficiency',
65:'grounds where they address market failure, such as public goods and externalities. they may also be justified where they improve',
66:'the efficiency of the governments internal operations, such as costsaving investments. 2 explicit assumptions. analyses should be explicit about the',
67:'underlying assumptions used to arrive at estimates of future benefits and costs. in the case of public health programs, for',
68:'example, it may be necessary to make assumptions about the number of future beneficiaries, the intensity of service, and the',
69:'rate of increase in medical prices. the analysis should include a statement of the assumptions, the rationale behind them, and',
70:'a review of their strengths and weaknesses. key data and results, such as yearbyyear estimates of benefits and costs, should',
71:'be reported to promote independent analysis and review. 3 evaluation of alternatives. analyses should also consider alternative means of achieving',
72:'program objectives by examining different program scales, different methods of provision, and different degrees of government involvement. for example, in',
73:'evaluating a decision to acquire a capital asset, the analysis should generally consider: i doing nothing; ii direct purchase; iii',
74:'upgrading, renovating, sharing, or converting existing government property; or iv leasing or contracting for services. 4 verification. retrospective studies to',
75:'determine whether anticipated benefits and costs have been realized are potentially valuable. such studies can be used to determine necessary',
76:'corrections in existing programs, and to improve future estimates of benefits and costs in these programs or related ones. agencies',
77:'should have a plan for periodic, resultsoriented evaluation of program effectiveness. they should also discuss the results of relevant evaluation',
78:'studies when proposing reauthorizations or increased program funding. 6. identifying and measuring benefits and costs. analyses should include comprehensive estimates',
79:'of the expected benefits and costs to society based on established definitions and practices for program and policy evaluation. social',
80:'net benefits, and not the benefits and costs to the federal government, should be the basis for evaluating government programs',
81:'or policies that have effects on private citizens or other levels of government. social benefits and costs can differ from',
82:'private benefits and costs as measured in the marketplace because of imperfections arising from: i external economies or diseconomies where',
83:'actions by one party impose benefits or costs on other groups that are not compensated in the market place; ii',
84:'monopoly power that distorts the relationship between marginal costs and market prices; and iii taxes or subsidies. a. identifying benefits',
85:'and costs. both intangible and tangible benefits and costs should be recognized. the relevant cost concept is broader than privatesector',
86:'production and compliance costs or government cash expenditures. costs should reflect the opportunity cost of any resources used, measured by',
87:'the return to those resources in their most productive application elsewhere. below are some guidelines to consider when identifying benefits',
88:'and costs. 1 incremental benefits and costs. calculation of net present value should be based on incremental benefits and costs.',
89:'sunk costs and realized benefits should be ignored. past experience is relevant only in helping to estimate what the value',
90:'of future benefits and costs might be. analyses should take particular care to identify the extent to which a policy',
91:'such as a subsidy program promotes substitutes for activities of a similar nature that would occur without the policy. either',
92:'displaced activities should be explicitly recorded as costs or only incremental gains should be recorded as benefits of the policy.',
93:'2 interactive effects. possible interactions between the benefits and costs being analyzed and other government activities should be considered. for',
94:'example, policies affecting agricultural output should reflect real economic values, as opposed to subsidized prices. 3 international effects. analyses should',
95:'focus on benefits and costs accruing to the citizens of the united states in determining net present value. where programs',
96:'or projects have effects outside the united states, these effects should be reported separately. 4 transfers. there are no economic',
97:'gains from a pure transfer payment because the benefits to those who receive such a transfer are matched by the',
98:'costs borne by those who pay for it. therefore, transfers should be excluded from the calculation of net present value.',
99:'transfers that arise as a result of the program or project being analyzed should be identified as such, however, and',
100:'their distributional effects discussed. it should also be recognized that a transfer program may have benefits that are less than',
101:'the programs real economic costs due to inefficiencies that can arise in the programs delivery of benefits and financing. b.',
102:'measuring benefits and costs. the principle of willingnesstopay provides an aggregate measure of what individuals are willing to forego to',
103:'obtain a given benefit. market prices provide an invaluable starting point for measuring willingnesstopay, but prices sometimes do not adequately',
104:'reflect the true value of a good to society. externalities, monopoly power, and taxes or subsidies can distort market prices.',
105:'taxes, for example, usually create an excess burden that represents a net loss to society. the appropriate method for recognizing',
106:'this excess burden in public investment analyses is discussed in section 11. in other cases, market prices do not exist',
107:'for a relevant benefit or cost. when market prices are distorted or unavailable, other methods of valuing benefits may have',
108:'to be employed. measures derived from actual market behavior are preferred when they are available. 1 inframarginal benefits and costs.',
109:'consumers would generally be willing to pay more than the market price rather than go entirely without a good they',
110:'consume. the economists concept of consumer surplus measures the extra value consumers derive from their consumption compared with the value',
111:'measured at market prices. when it can be determined, consumer surplus provides the best measure of the total benefit to',
112:'society from a government program or project. consumer surplus can sometimes be calculated by using econometric methods to estimate consumer',
113:'demand. 2 indirect measures of benefits and costs. willingnesstopay can sometimes be estimated indirectly through changes in land values, variations',
114:'in wage rates, or other methods. such methods are most reliable when they are based on actual market transactions. measures',
115:'should be consistent with basic economic principles and should be replicable. 3 multiplier effects. generally, analyses should treat resources as',
116:'if they were likely to be fully employed. employment or output multipliers that purport to measure the secondary effects of',
117:'government expenditures on employment and output should not be included in measured social benefits or costs. 7. treatment of inflation.',
118:'future inflation is highly uncertain. analysts should avoid having to make an assumption about the general rate of inflation whenever',
119:'possible. a. real or nominal values. economic analyses are often most readily accomplished using real or constantdollar values, i.e., by',
120:'measuring benefits and costs in units of stable purchasing power. such estimates may reflect expected future changes in relative prices,',
121:'however, where there is a reasonable basis for estimating such changes. where future benefits and costs are given in nominal',
122:'terms, i.e., in terms of the future purchasing power of the dollar, the analysis should use these values rather than',
123:'convert them to constant dollars as, for example, in the case of leasepurchase analysis. nominal and real values must not',
124:'be combined in the same analysis. logical consistency requires that analysis be conducted either in constant dollars or in terms',
125:'of nominal values. this may require converting some nominal values to real values, or vice versa. b. recommended inflation assumption.',
126:'when a general inflation assumption is needed, the rate of increase in the gross domestic product deflator from the administrations',
127:'economic assumptions for the period of the analysis is recommended. for projects or programs that extend beyond the sixyear budget',
128:'horizon, the inflation assumption can be extended by using the inflation rate for the sixth year of the budget forecast.',
129:'the administrations economic forecast is updated twice annually, at the time the budget is published in january or february and',
130:'at the time of the midsession review of the budget in july. alternative inflation estimates, based on credible private sector',
131:'forecasts, may be used for sensitivity analysis. 8. discount rate policy. in order to compute net present value, it is',
132:'necessary to discount future benefits and costs. this discounting reflects the time value of money. benefits and costs are worth',
133:'more if they are experienced sooner. all future benefits and costs, including nonmonetized benefits and costs, should be discounted. the',
134:'higher the discount rate, the lower is the present value of future cash flows. for typical investments, with costs concentrated',
135:'in early periods and benefits following in later periods, raising the discount rate tends to reduce the net present value.',
136:'technical guidance on discounting and a table of discount factors are provided in appendix b. a. real versus nominal discount',
137:'rates. the proper discount rate to use depends on whether the benefits and costs are measured in real or nominal',
138:'terms. 1 a real discount rate that has been adjusted to eliminate the effect of expected inflation should be used',
139:'to discount constantdollar or real benefits and costs. a real discount rate can be approximated by subtracting expected inflation from',
140:'a nominal interest rate. 2 a nominal discount rate that reflects expected inflation should be used to discount nominal benefits',
141:'and costs. market interest rates are nominal interest rates in this sense. b. public investment and regulatory analyses. the guidance',
142:'in this section applies to benefitcost analyses of public investments and regulatory programs that provide benefits and costs to the',
143:'general public. guidance related to costeffectiveness analysis of internal planning decisions of the federal government is provided in section 8.c.',
144:'in general, public investments and regulations displace both private investment and consumption. to account for this displacement and to promote',
145:'efficient investment and regulatory policies, the following guidance should be observed. 1 basecase analysis. constantdollar benefitcost analyses of proposed investments',
146:'and regulations should report net present value and other outcomes determined using a real discount rate of 7 percent. this',
147:'rate approximates the marginal pretax rate of return on an average investment in the private sector in recent years. significant',
148:'changes in this rate will be reflected in future updates of this circular. 2 other discount rates. analyses should show',
149:'the sensitivity of the discounted net present value and other outcomes to variations in the discount rate. the importance of',
150:'these alternative calculations will depend on the specific economic characteristics of the program under analysis. for example, in analyzing a',
151:'regulatory proposal whose main cost is to reduce business investment, net present value should also be calculated using a higher',
152:'discount rate than 7 percent. analyses may include among the reported outcomes the internal rate of return implied by the',
153:'stream of benefits and costs. the internal rate of return is the discount rate that sets the net present value',
154:'of the program or project to zero. while the internal rate of return does not generally provide an acceptable decision',
155:'criterion, it does provide useful information, particularly when budgets are constrained or there is uncertainty about the appropriate discount rate.',
156:'3 using the shadow price of capital to value benefits and costs is the analytically preferred means of capturing the',
157:'effects of government projects on resource allocation in the private sector. to use this method accurately, the analyst must be',
158:'able to compute how the benefits and costs of a program or project affect the allocation of private consumption and',
159:'investment. omb concurrence is required if this method is used in place of the base case discount rate. c. costeffectiveness,',
160:'leasepurchase, internal government investment, and asset sales analyses. the treasurys borrowing rates should be used as discount rates in the',
161:'following cases: 1 costeffectiveness analysis. analyses that involve constantdollar costs should use the real treasury borrowing rate on marketable securities',
162:'of comparable maturity to the period of analysis. this rate is computed using the administrations economic assumptions for the budget,',
163:'which are published in january of each year. a table of discount rates based on the expected interest rates for',
164:'the first year of the budget forecast is presented in appendix c of this circular. appendix c is updated annually',
165:'and is available upon request from omb. real treasury rates are obtained by removing expected inflation over the period of',
166:'analysis from nominal treasury interest rates. analyses that involve nominal costs should use nominal treasury rates for discounting, as described',
167:'in the following paragraph. 2 leasepurchase analysis. analyses of nominal lease payments should use the nominal treasury borrowing rate on',
168:'marketable securities of comparable maturity to the period of analysis. nominal treasury borrowing rates should be taken from the economic',
169:'assumptions for the budget. a table of discount rates based on these assumptions is presented in appendix c of this',
170:'circular, which is updated annually. constant dollar leasepurchase analyses should use the real treasury borrowing rate, described in the preceding',
171:'paragraph. 3 internal government investments. some federal investments provide internal benefits which take the form of increased federal revenues or',
172:'decreased federal costs. an example would be an investment in an energyefficient building system that reduces federal operating costs. unlike',
173:'the case of a federally funded highway which provides external benefits to society as a whole, it is appropriate to',
174:'calculate such a projects net present value using a comparablematurity treasury rate as a discount rate. the rate used may',
175:'be either nominal or real, depending on how benefits and costs are measured. some federal activities provide a mix of',
176:'both federal cost savings and external social benefits. for example, federal investments in information technology can produce federal savings in',
177:'the form of lower administrative costs and external social benefits in the form of faster claims processing. the net present',
178:'value of such investments should be evaluated with the 7 percent real discount rate discussed in section 8.b. unless the',
179:'analysis is able to allocate the investments costs between provision of federal cost savings and external social benefits. where such',
180:'an allocation is possible, federal cost savings and their associated investment costs may be discounted at the treasury rate, while',
181:'the external social benefits and their associated investment costs should be discounted at the 7 percent real rate. 4 asset',
182:'sale analysis. analysis of possible asset sales should reflect the following: a the net present value to the federal government',
183:'of holding an asset is best measured by discounting its future earnings stream using a treasury rate. the rate used',
184:'may be either nominal or real, depending on how earnings are measured. b analyses of government asset values should explicitly',
185:'deduct the cost of expected defaults or delays in payment from projected cash flows, along with government administrative costs. such',
186:'analyses should also consider explicitly the probabilities of events that would cause the asset to become nonfunctional, impaired or obsolete,',
187:'as well as probabilities of events that would increase asset value. c analyses of possible asset sales should assess the',
188:'gain in social efficiency that can result when a government asset is subject to market discipline and private incentives. even',
189:'though a government asset may be used more efficiently in the private sector, potential privatesector purchasers will generally discount such',
190:'an assets earnings at a rate in excess of the treasury rate, in part, due to the cost of bearing',
191:'risk. when there is evidence that government assets can be used more efficiently in the private sector, valuation analyses for',
192:'these assets should include sensitivity comparisons that discount the returns from such assets with the rate of interest earned by',
193:'assets of similar riskiness in the private sector. 9. treatment of uncertainty. estimates of benefits and costs are typically uncertain',
194:'because of imprecision in both underlying data and modeling assumptions. because such uncertainty is basic to many analyses, its effects',
195:'should be analyzed and reported. useful information in such a report would include the key sources of uncertainty; expected value',
196:'estimates of outcomes; the sensitivity of results to important sources of uncertainty; and where possible, the probability distributions of benefits,',
197:'costs, and net benefits. a. characterizing uncertainty. analyses should attempt to characterize the sources and nature of uncertainty. ideally, probability',
198:'distributions of potential benefits, costs, and net benefits should be presented. it should be recognized that many phenomena that are',
199:'treated as deterministic or certain are, in fact, uncertain. in analyzing uncertain data, objective estimates of probabilities should be used',
200:'whenever possible. market data, such as private insurance payments or interest rate differentials, may be useful in identifying and estimating',
201:'relevant risks. stochastic simulation methods can be useful for analyzing such phenomena and developing insights into the relevant probability distributions.',
202:'in any case, the basis for the probability distribution assumptions should be reported. any limitations of the analysis because of',
203:'uncertainty or biases surrounding data or assumptions should be discussed. b. expected values. the expected values of the distributions of',
204:'benefits, costs and net benefits can be obtained by weighting each outcome by its probability of occurrence, and then summing',
205:'across all potential outcomes. if estimated benefits, costs and net benefits are characterized by point estimates rather than as probability',
206:'distributions, the expected value an unbiased estimate is the appropriate estimate for use. estimates that differ from expected values such',
207:'as worstcase estimates may be provided in addition to expected values, but the rationale for such estimates must be clearly',
208:'presented. for any such estimate, the analysis should identify the nature and magnitude of any bias. for example, studies of',
209:'past activities have documented tendencies for cost growth beyond initial expectations; analyses should consider whether past experience suggests that initial',
210:'estimates of benefits or costs are optimistic. c. sensitivity analysis. major assumptions should be varied and net present value and',
211:'other outcomes recomputed to determine how sensitive outcomes are to changes in the assumptions. the assumptions that deserve the most',
212:'attention will depend on the dominant benefit and cost elements and the areas of greatest uncertainty of the program being',
213:'analyzed. for example, in analyzing a retirement program, one would consider changes in the number of beneficiaries, future wage growth,',
214:'inflation, and the discount rate. in general, sensitivity analysis should be considered for estimates of: i benefits and costs; ii',
215:'the discount rate; iii the general inflation rate; and iv distributional assumptions. models used in the analysis should be well',
216:'documented and, where possible, available to facilitate independent review. d. other adjustments for uncertainty. the absolute variability of a risky',
217:'outcome can be much less significant than its correlation with other significant determinants of social welfare, such as real national',
218:'income. in general, variations in the discount rate are not the appropriate method of adjusting net present value for the',
219:'special risks of particular projects. in some cases, it may be possible to estimate certaintyequivalents which involve adjusting uncertain expected',
220:'values to account for risk. 10. incidence and distributional effects. the principle of maximizing net present value of benefits is',
221:'based on the premise that gainers could fully compensate the losers and still be better off. the presence or absence',
222:'of such compensation should be indicated in the analysis. when benefits and costs have significant distributional effects, these effects should',
223:'be analyzed and discussed, along with the analysis of net present value. this will not usually be the case for',
224:'costeffectiveness analysis where the scope of government activity is not changing. a. alternative classification. distributional effects may be analyzed by',
225:'grouping individuals or households according to income class e.g., income quintiles, geographical region, or demographic group e.g., age. other classifications,',
226:'such as by industry or occupation, may be appropriate in some circumstances. analysis should aim at identifying the relevant gainers',
227:'and losers from policy decisions. effects on the preexisting assignment of property rights by the program under analysis should be',
228:'reported. where a policy is intended to benefit a specified subgroup of the population, such as the poor, the analysis',
229:'should consider how effective the policy is in reaching its targeted group. b. economic incidence. individuals or households are the',
230:'ultimate recipients of income; business enterprises are merely intermediaries. analyses of distribution should identify economic incidence, or how costs and',
231:'benefits are ultimately borne by households or individuals. determining economic incidence can be difficult because benefits and costs are often',
232:'redistributed in unintended and unexpected ways. for example, a subsidy for the production of a commodity will usually raise the',
233:'incomes of the commoditys suppliers, but it can also benefit consumers of the commodity through lower prices and reduce the',
234:'incomes for suppliers of competing products. a subsidy also raises the value of specialized resources used in the production of',
235:'the subsidized commodity. as the subsidy is incorporated in asset values, its distributional effects can change. 11. special guidance for',
236:'public investment. this guidance applies only to public investments with social benefits apart from decreased federal costs. it is not',
237:'required for costeffectiveness or leasepurchase analyses. because taxes generally distort relative prices, they impose a burden in excess of the',
238:'revenues they raise. recent studies of the u.s. tax system suggest a range of values for the marginal excess burden,',
239:'of which a reasonable estimate is 25 cents per dollar of revenue. a. analysis of excess burdens. the presentation of',
240:'results for public investments that are not justified on costsaving grounds should include a supplementary analysis with a 25 percent',
241:'excess burden. thus, in such analyses, costs in the form of public expenditures should be multiplied by a factor of',
242:'1.25 and net present value recomputed. b. exceptions. where specific information clearly suggests that the excess burden is lower or',
243:'higher than 25 percent, analyses may use a different figure. when a different figure is used, an explanation should be',
244:'provided for it. an example of such an exception is an investment funded by user charges that function like market',
245:'prices; in this case, the excess burden would be zero. another example would be a project that provides both cost',
246:'savings to the federal government and external social benefits. if it is possible to make a quantitative determination of the',
247:'portion of this projects costs that give rise to federal savings, that portion of the costs may be exempted from',
248:'multiplication by the factor of 1.25. 12. special guidance for regulatory impact analysis. additional guidance for analysis of regulatory policies',
249:'is provided in regulatory program of the united states government which is published annually by omb. see regulatory impact analysis',
250:'guidance, appendix v of regulatory program of the united states government for april 1, 1991 to march 31, 1992. 13.',
251:'special guidance for leasepurchase analysis. the special guidance in this section does not apply to the decision to acquire the',
252:'use of an asset. in deciding that, the agency should conduct a benefitcost analysis, if possible. only after the decision',
253:'to acquire the services of an asset has been made is there a need to analyze the decision whether to',
254:'lease or purchase. a. coverage. the circular applies only when both of the following tests of applicability are satisfied: 1',
255:'the leasepurchase analysis concerns a capital asset, including durable goods, equipment, buildings, facilities, installations, or land which: a is leased',
256:'to the federal government for a term of three or more years; or, b is new, with an economic life',
257:'of less than three years, and leased to the federal government for a term of 75 percent or more of',
258:'the economic life of the asset; or, c is built for the express purpose of being leased to the federal',
259:'government; or, d is leased to the federal government and clearly has no alternative commercial use e.g., a special purpose',
260:'government installation. 2 the leasepurchase analysis concerns a capital asset or a group of related assets whose total fair market',
261:'value exceeds $1 million. b. required justification for leases. all leases of capital assets must be justified as preferable to',
262:'direct government purchase and ownership. this can be done in one of three ways: 1 by conducting a separate leasepurchase',
263:'analysis. this is the only acceptable method for major acquisitions. a lease represents a major acquisition if: a the acquisition',
264:'represents a separate lineitem in the agencys budget; b the agency or omb determines the acquisition is a major one;',
265:'or c the total purchase price of the asset or group of assets to be leased would exceed $500 million.',
266:'2 by conducting periodic leasepurchase analyses of recurrent decisions to lease similar assets used for the same general purpose. such',
267:'analyses would apply to the entire class of assets. omb approval should be sought in determining the scope of any',
268:'such generic analysis. 3 by adopting a formal policy for smaller leases and submitting that policy to the omb for',
269:'approval. following such a policy should generally result in the same lease purchase decisions as would conducting separate lease purchase',
270:'analyses. before adopting the policy, it should be demonstrated that: a the leases in question would generally result in substantial',
271:'savings to the government that could not be realized on a purchase; b the leases are so small or so',
272:'shortterm as to make separate leasepurchase analysis impractical; and c leases of different types are scored consistently with the instructions',
273:'in appendices b and c of omb circular no. a11. c. analytical requirements and definitions. whenever a federal agency needs',
274:'to acquire the use of a capital asset, it should do so in the way that is least expensive for',
275:'the government as a whole. 1 lifecycle cost. leasepurchase analyses should compare the net discounted present value of the lifecycle',
276:'cost of leasing with the full costs of buying or constructing an identical asset. the full costs of buying include',
277:'the assets purchase price plus the net discounted present value of any relevant ancillary services connected with the purchase. guidance',
278:'on the discount rate to use for leasepurchase analysis is in section 8.c. 2 economic life. for purposes of leasepurchase',
279:'analysis, the economic life of an asset is its remaining or productive lifetime. it begins when the asset is acquired',
280:'and ends when the asset is retired from service. the economic life is frequently not the same as the useful',
281:'life for tax purposes. 3 purchase price. the purchase price of the asset for purposes of leasepurchase analysis is its',
282:'fair market value, defined as the price a willing buyer could reasonably expect to pay a willing seller in a',
283:'competitive market to acquire the asset. a in the case of property that is already owned by the federal government',
284:'or that has been donated or acquired by condemnation, an imputed purchase price should be estimated. guidance on making imputations',
285:'is provided in section 13.c.6. b if public land is used for the site of the asset, the imputed market',
286:'value of the land should be added to the purchase price. c the assets estimated residual value, as of the',
287:'end of the period of analysis, should be subtracted from its purchase price. guidance on estimating residual value is provided',
288:'in section 13.c.7. 4 taxes. in analyzing the cost of a lease, the normal payment of taxes on the lessors',
289:'income from the lease should not be subtracted from the lease costs since the normal payment of taxes will also',
290:'be reflected in the purchase cost. the cost to the treasury of special tax benefits, if any, associated with the',
291:'lease should be added to the cost of the lease. examples of such tax benefits might include highly accelerated depreciation',
292:'allowances or taxfree financing. 5 ancillary services. if the terms of the lease include ancillary services provided by the lessor,',
293:'the present value of the cost of obtaining these services separately should be added to the purchase price. such costs',
294:'may be excluded if they are estimated to be the same for both lease and purchase alternatives or too small',
295:'to affect the comparison. examples of ancillary services include: a all costs associated with acquiring the property and preparing it',
296:'for use, including construction, installation, site, design, and management costs. b repair and improvement costs if included in lease payments.',
297:'c operation and maintenance costs if included in lease payments. d imputed property taxes excluding foreign property taxes on overseas',
298:'acquisitions except where actually paid. the imputed taxes approximate the costs of providing municipal services such as water, sewage, and',
299:'police and fire protection. see section 6 below. e imputed insurance premiums. see section 6 below. 6 estimating imputed costs.',
300:'certain costs associated with the federal purchase of an asset may not involve a direct monetary payment. some of these',
301:'imputed costs may be estimated as follows. a purchase price. an imputed purchase price for an asset that is already',
302:'owned by the federal government or which has been acquired by donation or condemnation should be based on the fair',
303:'market value of similar properties that have been traded on commercial markets in the same or similar localities. the same',
304:'method should be followed in estimating the imputed value of any federal land used as a site for the asset.',
305:'b property taxes. imputed property taxes may be estimated in two ways. i determine the property tax rate and assessed',
306:'taxable value for comparable property in the intended locality. if there is no basis on which to estimate future changes',
307:'in tax rates or assessed values, the firstyear tax rate and assessed value inflation adjusted for each subsequent year can',
308:'be applied to all years. multiply the assessed value by the tax rate to determine the annual imputation for property',
309:'taxes. ii as an alternative to step i above, obtain an estimate of the current local effective property tax rate',
310:'from the building owners and managers associations regional exchange reports. multiply the fair market value of the governmentowned property inflation',
311:'adjusted for each year by the effective tax rate. c insurance premiums. determine local estimates of standard commercial coverage for',
312:'similar property from the building owners and managers associations regional exchange reports. 7 residual value. a propertys residual value is',
313:'an estimate of the price that the property could be sold for at the end of the period of the',
314:'leasepurchase analysis, measured in discounted present value terms. a the recommended way to estimate residual value is to determine what',
315:'similar, comparably aged property is currently selling for in commercial markets. b alternatively, book estimates of the resale value of',
316:'used property may be available from industry or government sources. c assessed values of similar, comparably aged properties determined for',
317:'property tax purposes may also be used. 8 renewal options. in determining the term of a lease, all renewal options',
318:'shall be added to the initial lease period. 14. related guidance. a. omb circular no. a11, preparation and submission of',
319:'annual budget estimates. b. omb circular no. a19, legislative coordination and clearance. c. omb circular no. a70, federal credit policy.',
320:'d. omb circular no. a76, performance of commercial activities. e. omb circular no. a109, policies to be followed in the',
321:'acquisition of major systems. f. omb circular no. a130, management of federal information resources. 9. joint omb and treasury guidelines',
322:'to the department of defense covering lease or charter arrangements for aircraft and naval vessels. h. executive order 12291, federal',
323:'regulation. i. regulatory impact analysis guidance, in regulatory program of the united states government. j. federal energy management and planning',
324:'programs; life cycle cost methodology and procedures, federal register, vol. 55, no. 17, january 25, 1990, and vol. 55, no.',
325:'224, november 20, 1990. k. presidential memorandum of april 29, 1992, benefits and costs of legislative proposals. 15. implementation. economic',
326:'analyses submitted to omb will be reviewed for conformity with items 5 to 13 in this circular, through the circular',
327:'no. a11 budget justification and submission process, and circular no. a19, legislative review process. 16. effective date. this circular is',
328:'effective immediately. 17. interpretation. questions concerning interpretation of this circular should be addressed to the office of economic policy, office',
329:'of management and budget 2023955873 or, in the case of regulatory issues and analysis, to the office of information and',
330:'regulatory affairs 2023954852. appendix a definition of terms benefitcost analysis a systematic quantitative method of assessing the desirability of government',
331:'projects or policies when it is important to take a long view of future effects and a broad view of',
332:'possible sideeffects. capital asset tangible property, including durable goods, equipment, buildings, installations, and land. certaintyequivalent a certain i.e., nonrandom outcome',
333:'that an individual values equally to an uncertain outcome. for a riskaverse individual, the certaintyequivalent for an uncertain set of',
334:'benefits may be less than the mathematical expectation of the outcome; for example, an individual may value a 5050 chance',
335:'of winning $100 or $0 as only $45. analogously, a riskaverse individual may have a certaintyequivalent for an uncertain set',
336:'of costs that is larger in magnitude than the mathematical expectation of costs. costeffectiveness a systematic quantitative method for comparing',
337:'the costs of alternative means of achieving the same stream of benefits or a given objective. consumer surplus the maximum',
338:'sum of money a consumer would be willing to pay to consume a given amount of a good, less the',
339:'amount actually paid. it is represented graphically by the area between the demand curve and the price line in a',
340:'diagram representing the consumers demand for the good as a function of its price. discount rate the interest rate used',
341:'in calculating the present value of expected yearly benefits and costs. discount factor the factor that translates expected benefits or',
342:'costs in any given future year into present value terms. the discount factor is equal to 1/1 + it where',
343:'i is the interest rate and t is the number of years from the date of initiation for the program',
344:'or policy until the given future year. excess burden unless a tax is imposed in the form of a lump',
345:'sum unrelated to economic activity, such as a head tax, it will affect economic decisions on the margin. departures from',
346:'economic efficiency resulting from the distorting effect of taxes are called excess burdens because they disadvantage society without adding to',
347:'treasury receipts. this concept is also sometimes referred to as deadweight loss. external economy or diseconomy a direct effect, either',
348:'positive or negative, on someones profit or welfare arising as a byproduct of some other persons or firms activity. also',
349:'referred to as neighborhood or spillover effects, or externalities for short. incidence the ultimate distributional effect of a tax, expenditure,',
350:'or regulatory program. inflation the proportionate rate of change in the general price level, as opposed to the proportionate increase',
351:'in a specific price. inflation is usually measured by a broadbased price index, such as the implicit deflator for gross',
352:'domestic product or the consumer price index. internal rate of return the discount rate that sets the net present value',
353:'of the stream of net benefits equal to zero. the internal rate of return may have multiple values when the',
354:'stream of net benefits alternates from negative to positive more than once. life cycle cost the overall estimated cost for',
355:'a particular program alternative over the time period corresponding to the life of the program, including direct and indirect initial',
356:'costs plus any periodic or continuing costs of operation and maintenance. multiplier the ratio between the direct effect on output',
357:'or employment and the full effect, including the effects of second order rounds or spending. multiplier effects greater than 1.0',
358:'require the existence of involuntary unemployment. net present value the difference between the discounted present value of benefits and the',
359:'discounted present value of costs. nominal values economic units measured in terms of purchasing power of the date in question.',
360:'a nominal value reflects the effects of general price inflation. nominal interest rate an interest rate that is not adjusted',
361:'to remove the effects of actual or expected inflation. market interest rates are generally nominal interest rates. opportunity cost the',
362:'maximum worth of a good or input among possible alternative uses. real or constant dollar values economic units measured in',
363:'terms of constant purchasing power. a real value is not affected by general price inflation. real values can be estimated',
364:'by deflating nominal values with a general price index, such as the implicit deflator for gross domestic product or the',
365:'consumer price index. real interest rate an interest rate that has been adjusted to remove the effect of expected or',
366:'actual inflation. real interest rates can be approximated by subtracting the expected or actual inflation rate from a nominal interest',
367:'rate. a precise estimate can be obtained by dividing one plus the nominal interest rate by one plus the expected',
368:'or actual inflation rate, and subtracting one from the resulting quotient. relative price a price ratio between two goods as,',
369:'for example, the ratio of the price of energy to the price of equipment. shadow price an estimate of what',
370:'the price of a good or input would be in the absence of market distortions, such as externalities or taxes.',
371:'for example, the shadow price of capital is the present value of the social returns to capital before corporate income',
372:'taxes measured in units of consumption. sunk cost a cost incurred in the past that will not be affected by',
373:'any present or future decision. sunk costs should be ignored in determining whether a new investment is worthwhile. transfer payment',
374:'a payment of money or goods. a pure transfer is unrelated to the provision of any goods or services in',
375:'exchange. such payments alter the distribution of income, but do not directly affect the allocation of resources on the margin.',
376:'treasury rates rates of interest on marketable treasury debt. such debt is issued in maturities ranging from 91 days to',
377:'30 years. willingness to pay the maximum amount an individual would be willing to give up in order to secure',
378:'a change in the provision of a good or service. appendix b additional guidance for discounting 1. sample format for',
379:'discounting deferred costs and benefits assume a 10year program which will commit the government to the stream of real or',
380:'constantdollar expenditures appearing in column 2 of the table below and which will result in a series of real benefits',
381:'appearing in column 3. the discount factor for a 7 percent discount rate is shown in column 4. the present',
382:'value cost for each of the 10 years is calculated by multiplying column 2 by column 4; the present value',
383:'benefit for each of the 10 years is calculated by multiplying column 3 by column 4. the present values of',
384:'costs and benefits are presented in columns 5 and 6 respectively. year since initiation, renewal or expansion 1 expected yearly',
385:'cost 2 expected yearly benefit 3 discount factors for 7% 4 present value of costs col. 2 x col. 4',
386:'5 present value of benefits col. 3 x col. 4 6 1 $10.00 $ 0.00 0.9346 $ 9.35 $ 0.00',
387:'2 20.00 0.00 0.8734 17.47 0.00 3 30.00 5.00 0.8163 24.49 4.08 4 30.00 10.00 0.7629 22.89 7.63 5 20.00',
388:'30.00 0.7130 14.26 21.39 6 10.00 40.00 0.6663 6.66 26.65 7 5.00 40.00 0.6227 3.11 24.91 8 5.00 40.00 0.5820',
389:'2.91 23.28 9 5.00 40.00 0.5439 2.72 21.76 10 5.00 25.00 0.5083 2.54 12.71 total $106.40 $142.41 note: the discount',
390:'factor is calculated as 1/1 + it where i is the interest rate .07 and t is the year. the',
391:'sum of column 5 is the total present value of costs and the sum of column 6 is the total',
392:'present value of benefits. net present value is $36.01, the difference between the sum of discounted benefits and the sum',
393:'of discounted costs. 2. endofyear and midyear discount factors the discount factors presented in the table above are calculated on',
394:'the implicit assumption that costs and benefits occur as lump sums at yearend. when costs and benefits occur in a',
395:'steady stream, applying midyear discount factors is more appropriate. for instance, the first cost in the table may be estimated',
396:'to occur after six months, rather than at the end of one year to approximate better a steady stream of',
397:'costs and benefits occurring over the first year. similarly, it may be assumed that all other costs and benefits are',
398:'advanced six months to approximate better a continuing steady flow. the present values of costs and benefits computed from the',
399:'table above can be converted to a midyear discounting basis by multiplying them by 1.0344 the square root of 1.07.',
400:'thus, if the above example were converted to a midyear basis, the present value of costs would be $110.06, the',
401:'present value of benefits would be $147.31, and the net present value would be $37.25. 3. illustrative discount factors for',
402:'discount rate of 7 percent year since beginning initiation, yearend midyear ofyear renewal or discount discount discount expansion factors factors',
403:'factors 1 0.9346 0.9667 1.0000 2 0.8734 0.9035 0.9346 3 0.8163 0.8444 0.8734 4 0.7629 0.7891 0.8163 5 0.7130 0.7375',
404:'0.7629 6 0.6663 0.6893 0.7130 7 0.6227 0.6442 0.6663 8 0.5820 0.6020 0.6227 9 0.5439 0.5626 0.5820 10 0.5083 0.5258',
405:'0.5439 11 0.4751 0.4914 0.5083 12 0.4440 0.4593 0.4751 13 0.4150 0.4292 0.4440 14 0.3878 0.4012 0.4150 15 0.3624 0.3749',
406:'0.3878 16 0.3387 0.3504 0.3624 17 0.3166 0.3275 0.3387 18 0.2959 0.3060 0.3166 19 0.2765 0.2860 0.2959 20 0.2584 0.2673',
407:'0.2765 21 0.2415 0.2498 0.2584 22 0.2257 0.2335 0.2415 23 0.2109 0.2182 0.2257 24 0.1971 0.2039 0.2109 25 0.1842 0.1906',
408:'0.1971 26 0.1722 0.1781 0.1842 27 0.1609 0.1665 0.1722 28 0.1504 0.1556 0.1609 29 0.1406 0.1454 0.1504 30 0.1314 0.1359',
409:'0.1406',