Earlier this summer, the Federal Emergency Management Agency, released the Fiscal Year 2022 (FY22) Notices of Funding Opportunities (NOFOs) for their Flood Mitigation Assistance (FMA) and Building Resilient Infrastructure and Communities (BRIC) programs. To be successful in these competitive programs, projects must be deemed cost-effective by the Agency, yet achieving cost-effectiveness has often been easier said than done because of the FEMA Benefit Cost Analysis (BCA) tool’s use of the 1992 OMB Circular No. A-94 ‘s seemingly high 7 percent discount rate.
What is a BCA Discount Rate?
In calculating a project’s costs and benefits, discount rates are applied to translate potential future costs and benefits into present values. While this calculation is helpful for long-term planning considerations, using a high discount rate almost always reduces the future value of a project’s associated costs and benefits – often leading FEMA to select lower-cost, more straightforward projects that are relatively short-lived (e.g., ten years or less) and result in more immediate monetary and tangible benefits.
To realize BRIC and FMA’s expressed goals of bolstering community resilience nationwide, particularly in disadvantaged communities, many mitigation practitioners have been calling for FEMA to lower and/ or increase the flexibility surrounding the current BCA discount rate. Last Friday, FEMA released new guidance for an alternative cost-effectiveness methodology for this year’s BRIC and FMA programs – publicly recognizing the continued challenges communities face while trying to demonstrate the cost-effectiveness of their projects. This new, ‘people first’ approach is long overdue and will both increase the flexibility of and take a climate-informed approach to the BCA calculation process.
How Will This Change Work?
If a BCA using the 7 percent discount rate is deemed cost-ineffective, FEMA would consider the project cost-effective if the BCA generated at the 7 percent discount rate is equal to or greater than a Benefit Cost Ratio (BCR) of 0.75, rather than the traditional BCR of 1.0. Likewise, FEMA will consider the same project cost-effective if the BCR reaches 1.0 using a discount rate of 3 percent. By allowing flexibility with the discount rate, longer-term projects will likely benefit the most.
In order to utilize this approach, subapplicants/applicants must also demonstrate how the mitigation activity benefits a disadvantaged community; addresses climate change impacts; includes hard to quantify benefits; and/or is subject to higher costs due to the use of low carbon building materials or compliance with the Federal Flood Risk Management Standard. This justification will need to be included in the BRIC/FMA subapplication in the form of an Alternative Cost-Effectiveness Methodology Narrative.
Source: FEMA Memo – Alternative Cost-Effectiveness Methodology for Fiscal Year 2022 BRIC and FMA Application Cycle
What’s Next?
This change, for Fiscal Year (FY) 2022 BRIC and FMA, is not the first change the Agency has announced this year designed to increase flexibility with demonstrating the cost-effectiveness of a project. FEMA also released new pre-calculated benefits and waived the 0.75 threshold for the use of social (mental stress and anxiety/lost productivity) and ecosystem service benefits. These BCA related changes are assisting communities to overcome the challenges of proving a project’s cost-effectiveness – likely increasing the number of cost-effective BRIC and FMA projects this year and, hopefully, producing more projects that benefit disadvantaged communities.
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Amelia Muccio is the Director of Mitigation at Hagerty Consulting and a subject matter expert in disaster recovery. With over 15 years of experience in public health, disaster preparedness, mitigation, and financial recovery, Amelia has helped clients obtain $5 billion in federal funds after major disasters, including Hurricane Sandy and Harvey and the California Wildfires.