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# Circular No. A

- 94 Revised

(Transmittal Memo No. 64) October 29, 1992

MEMORANDUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS

SUBJECT: Guidelines and Discount Rates for Benefit- Cost Analysis of Federal Programs

Table of Contents Purpose 1. Rescission 2. Authority 3. Scope 4. General Principles 5. Net Present Value and Related Outcome Measures a. Cost-Effectiveness Analysis b. Elements of Benefit-Cost or Cost-Effectiveness Anal ysis c. Identifying and Measuring Benefits and Costs 6. Identifying Benefits and Costs a. Measuring Benefits and Costs b. Treatment of Inflation 7. Real or Nominal Values a. Recommended Inflation Assumption b. Discount Rate Policy 8. Real versus Nominal Discount Rates a. Public Investment and Regulatory Analyses b. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094Cost-Effectiveness, Lease-Purchase,Internal Governm ent Investment, and Asset Sale Analyses

c. Treatment of Uncertainty 9. Characterizing Uncertainty a. Expected Values b. Sensitivity Analysis c. Other Adjustments for Uncertainty d. Incidence and Distributional Effects 10. Alternative Classifications a. Economic Incidence b. Special Guidance for Public Investment Analysis 11. Analysis of Excess Burdens a. Exceptions b. Special Guidance for Regulatory Impact Analysis 12. Special Guidance for Lease-Purchase Analysis 13. Coverage a. Required Justification for Leases b. Analytical Requirements and Definitions c. Related Guidance 14. Implementation 15. Effective Date 16. Interpretation 17. Appendix A: Definitions of Terms Appendix B: Additional Guidance for Discounting Appendix C: Discount Rates for Cost-Effectiveness, Lease-Purchase, and Related Analyses

Other Documents

1. Purpose . The goal of this Circular is to promote efficient resource allocation through well-informed decision -making by the Federal Government. It provides general guid ance for conducting benefit-cost and cost-effective ness analyses. It also provides specific guidance on the discount rates to be used in evaluating Federal programs who se benefits and costs are distributed over time. The general guidan ce will serve as a checklist of whether an agency h as considered and properly dealt with all the elements for sound benefit-cost and cost-effectiveness analyses.

2. Rescission . This Circular replaces and rescinds Office of Man agement and Budget (OMB) Circular No. A-94, "Discount Rates to Be Used in Evaluating Time-Distr ibuted Costs and Benefits," dated March 27, 1972, a nd Circular No. A-104, "Evaluating Leases of Capital Assets," d ated June 1, 1986, which has been rescinded. Lease- purchase analysis is only appropriate after a decision has b een made to acquire the services of an asset. Guida nce for leasepurchase analysis is provided in Section 8.c.(2) an d 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. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a0944. Scope . This Circular does not supersede agency practices which are prescribed by or pursuant to law, Execut ive

Order, or other relevant circulars. The Circular's guidelines are suggested for use in the internal pl anning of Executive Branch agencies. The guidelines must be followed in all analyses submitted to OMB in support of legisl ative and budget-programs in compliance with OMB Circulars No . A-11, "Preparation and Submission of Annual Budge t Estimates," and No. A-19, "Legislative Coordination and Clearance." These guidelines must also be foll owed in providing estimates submitted to OMB in compliance with Executive Order No. 12291, "Federal Regulation ," and the President's April 29, 1992 memorandum requiring ben efit-cost analysis for certain legislative proposal s. a. Aside from the exceptions listed below, the guid elines in this Circular apply to any analysis used to support Government decisions to initiate, renew, or expand programs or projects which would result in a series of measurable benefits or costs extending for three or more years into the future. The Circular applies specifically to:
Benefit-cost or cost-effectiveness analysis of Fede ral programs or policies. 1.

Regulatory impact analysis. 2.

Analysis of decisions whether to lease or purchase. 3.

Asset valuation and sale analysis. 4. b. Specifically exempted from the scope of this Cir cular are decisions concerning:
Water resource projects (guidance for which is the approved Economic and Environmental Principles and Guidelines for Water and Related Land Resources Imp lementation Studies)

. 1.

The acquisition of commercial-type services by Gove rnment or contractor operation (guidance for which is OMB Circular No. A-76). 2.

Federal energy management programs (guidance for wh ich can be found in the Federal Register of January 25, 1990, and November 20, 1990). 3.

c. This Circular applies to all agencies of the Exe cutive Branch of the Federal Government. It does no t apply to the Government of the District of Columbia or to non-Fe deral recipients of loans, contracts or grants. Rec ipients are encouraged, however, to follow the guidelines provi ded here when preparing analyses in support of Fede ral activities.
d. For small projects which share similar character istics, agencies are encouraged to conduct generic studies and to avoid duplication of effort in carrying out economi c analysis.

5. General Principles

. Benefit-cost analysis is recommended as the technique to use in a formal economic analysis of government programs or projects. Cost-effectiveness analysis is a less comprehensive technique, but it can be appropriate when the benefits from competing altern atives are the same or where a policydecision has b een made that the benefits must be provided. (Appendix A provides a glossary of technical terms used in this Circula r; technical terms are italicized when they first appear.)

a. Net Present Value and Related Outcome Measures . The standard criterion for deciding whether a gov ernment program can be justified on economic principles is net present value -- the discounted monetized value of expected net benefits (i.e., benefits minus costs). Net present value is computed by assigning monetary values to b enefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the s um total of discounted costs from the sum total of discounted b enefits. Discounting benefits and costs transforms gains and losses occurring in different time periods to a com mon unit of measurement. Programs with positive netpresent value increase social resources and are generally preferr ed. Programs with negative net present value should generally be avoided. (Section 8 considers discounting issues in more detail.) 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094Although net present value is not always computable (and it does not usually reflect effects on income distribution),

efforts to measure it can produce useful insights e ven when the monetary values of some benefits or co sts cannot be determined. In these cases:

A comprehensive enumeration of the different types of benefits and costs, mone tized or not, can be helpful in identifying the full range of program effects. 1.

Quantifying

benefits and costs is worthwhile, even when it is not feasible to assign monetary values; physical measurements

may be possible and useful. 2.

Other summary effectiveness measures can provide useful supplementary information to ne t present value, and analysts are encouraged to report them also. Exampl es include the number of injuries prevented per dol lar of cost (both measured in present value terms) or a project 's internal rate of return.

b. Cost-Effectiveness Analysis . A program is cost-effective if, on the basis of life cycle cost analysis of competing alternatives, it is determined to have the lowest c osts expressed in present value terms for a given a mount of benefits. Costeffectiveness analysis is appropriate whenever it is unnecessary or impractical to consider the do llar value of the benefits provided by the alternatives under conside ration. This is the case whenever (i) each alternat ive has the same annual benefits expressed in monetary terms; or (ii ) each alternative has the same annual affects, but dollar values cannot be assigned to their benefits. Analysis of a lternative defense systems often falls in this cate gory.
Cost-effectiveness analysis can also be used to com pare programs with identical costs but differing be nefits. In this case, the decision criterion is the discounted pres ent value of benefits. The alternative program with the largest benefits would normally be favored.

c. Elements of Benefit-Cost or Cost-Effectiveness Anal ysis

. Policy Rationale . The rationale for the Government program being ex amined should be clearly stated in the analysis. Programs may be justified on efficiency g rounds where they address market failure, such as p ublic goods and externalities. They may also be justified where they improve the efficiency of the Government's in ternal operations, such as cost-saving investments. 1.

Explicit Assumptions . Analyses should be explicit about the underlying assumptions used to arrive at estimates of future benefits and costs. In the case of public health programs, for example, it may be necessary to make assumptions about the number of future beneficiarie s, the intensity of service, and the rate of increa se in medical prices. The analysis should include a statement of the assumptions, the rationale behind them, and a r eview of their strengths and weaknesses. Key data and result s, such as year-by-year estimates of benefits and c osts, should be reported to promote independent analysis and review. 2.

Evaluation of Alternatives . Analyses should also consider alternative means o f achieving program objectives by examining different program scales , different methods of provision, and different degrees of government involvement. For example, in evaluating a decision to acquire a capital asset, the analysis should generally consider: (i) doing nothing; (ii) direct purchase; (iii) upgrading, renovating, sharing, or converting existing government property; or (iv) leasing or contracting for services. 3.

Verification . Retrospective studies to determine whether antici pated benefits and costs have been realized are potentially valuable. Such studies can be used to d etermine necessary corrections in existing programs , and to improve future estimates of benefits and costs in t hese programs or related ones. Agencies should have a plan for 4. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094periodic, results-oriented evaluation of program ef fectiveness. They should also discuss the results o f relevant

evaluation studies when proposing reauthorizations or increased program funding. 6. Identifying and Measuring Benefits and Costs . Analyses should include comprehensive estimates o f the expected benefits and costs to society based on established definitions and practices forprogram and policy evaluation. Social net benefits, and not the benefi ts and costs to the Federal Government, should be t he basis for evaluating government programs or policies that hav e effects on private citizens or other levels of go vernment. Social benefits and costs can differ from private benefits and costs as measured in the marketplace because o f imperfections arising from: (i) external economies or diseconomies where actions by one party impose benefits or cost s on other groups that are not compensated in the market place ; (ii) monopoly power that distorts the relationshi p between marginal costs and market prices; and (iii) taxes o r subsidies.

a. Identifying Benefits and Costs . Both intangible and tangible benefits and costs s hould be recognized. The relevant cost concept is broader than private-secto r production and compliance costs or government cas h expenditures. Costs should reflect the opportunity cost of any resources used, measured by the return to those resources in their most productive application else where. Below are some guidelines to consider when i dentifying benefits and costs.

Incremental Benefits and Costs . Calculation of net present value should be based on incremental benefits and costs. Sunk costs and realized benefits should be ignored. Past experience is relevant only in hel ping to estimate what the value of future benefits and cost s might be. Analyses should take particular care to identify the extent to which a policy such as a subsidy prog ram promotes substitutes for activities of a simila r nature that would occur without the policy. Either displaced ac tivities should be explicitly recorded as costs or only incremental gains should be recorded as benefits of the policy. •

Interactive Effects . Possible interactions between the benefits and co sts being analyzed and other government activities should be considered. For example, polic ies affecting agricultural output should reflect re al economic values, as opposed to subsidized prices. •

International Effects . Analyses should focus on benefits and costs accru ing to the citizens of the United States in determining net present value. Where programs orprojects have effects outside the United States, t hese effects should be reported separately. •

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 bo rne by those who pay for it. Therefore, transfers s hould be excluded from the calculation of net present value. Transfers that arise as a result of the program orproject being analyzed should be identified as such, howeve r, and their distributional effects discussed. It s hould also be recognized that a transfer program may have bene fits that are less than the program's real economic costs due to inefficiencies that can arise in the program 's delivery of benefits and financing. •

b. Measuring Benefits and Costs . The principle of willingness-to-pay provides an aggregate measure of what individuals are willing to forego to obtain a given benefit. Market prices provide an invaluable start ing point for measuring willingness-to-pay, but prices sometimes do not adequately reflect the true value of a good to society. Externalities, monopoly power, and taxes or subsidi es can distort market prices.
Taxes, for example, usually create an excess burden that represents a net loss to society. (The approp riate method for recognizing this excess burden in public investmentanalyses is discussed in Section 11.) In other cas es, market prices do not exist for a relevant benefit or cost. When market prices are distorted or unavailable, o ther methods of valuing benefits may have to be employed. Measures derived from actual market behavior are preferred w hen they are available. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094Inframarginal Benefits and Costs . Consumers would generally be willing to pay more than the market price

rather than go entirely without a good they consume . The economist's concept of consumer surplus measures the extra value consumers derive from their consumption compared with the value measured at market prices. When it can be determined, consumer surplus provides the be st measure of the total benefit to society from a g overnment program or project. Consumer surplus can sometimes be calculated by using econometric methods to estim ate consumer demand. 1.

Indirect Measures of Benefits and Costs . Willingness-to-pay can sometimes be estimated ind irectly through changes in land values, variations in wage rates, o r other methods. Such methods are most reliable whe n they are based on actual market transactions. Measures shoul d be consistent with basic economic principles and should be replicable. 2.

Multiplier Effects . Generally, analyses should treat resources as if they were likely to be fully employed. Employment or output multipliers that purport to me asure the secondary effects of government expenditu res on employment and output should not be included in mea sured social benefits or costs. 3.

7. Treatment of Inflation . Future inflation is highly uncertain. Analysts sh ould avoid having to make an assumption about the general rate of inflation whenever possib le.

a. Real or Nominal Values . Economic analyses are often most readily accompli shed using real or constant-dollar values, i.e., by measuring benefits and costs in un its of stable purchasing power. (Such estimates may reflect expected future changes in relative prices, however , where there is a reasonable basis for estimating such changes.) Where future benefits and costs are given in nominal terms, i.e., in terms of the future purchasing pow er of the dollar, the analysis should use these values rather than co nvert them to constant dollars as, for example, in the case of leasepurchase analysis.

Nominal and real values must not be combined in the same analysis. Logical consistency requires that a nalysis be conducted either in constant dollars or in terms ofnominal values. This may require converting some n ominal values to real values, or vice versa.

b. Recommended Inflation Assumption . When a general inflation assumption is needed, th e rate of increase in the Gross Domestic Product deflator from the Administra tion's economic assumptions for the period of the a nalysis is recommended. For projects or programs that extend b eyond the six-year budget horizon, the inflation as sumption can be extended by using the inflation rate for the six th year of the budget forecast. The Administration' s economic forecast is updated twice annually, at the time the budget i s published in January or February and at the time of the MidSession Review of the Budget in July. Alternative i nflation estimates, based on credible private secto r forecasts, may be used for sensitivity analysis.

8. Discount Rate Policy . In order to compute net present value, it is nece ssary to discount future benefits and costs. This discounting reflects the time value of money. Benefits and costs are worth more if they are exper ienced sooner. All future benefits and costs, including nonmonetiz ed benefits and costs, should be discounted. The hi gher the discount rate, the lower is the present value of fu ture cash flows. For typical investments, with cost s concentrated in early periods and benefits following in later perio ds, raising the discount rate tends to reduce the n et 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 whethe r the benefits and costs are measured in real or nominal terms.
A real discount rate that has been adjusted to elim inate the effect of expected inflation should be us ed to discount constant-dollar or real benefits and costs. A real discount rate can be approximated by subtracting ex pected 1. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094inflation from a nominal interest rate.

A nominal discount rate that reflects expected infl ation should be used to discount nominal benefits a nd costs. Market interest rates are nominal interest rates in this sense. 2.

b. Public Investment and Regulatory Analyses . The guidance in this section applies to benefit-c ost analyses of public investments and regulatory programs that pro vide benefits and costs to the general public. Guid ance related to cost-effectiveness analysis of internal planning de cisions of the Federal Government is provided in Se ction 8.c.
In general, public investments and regulations disp lace both private investment and consumption. To ac count for this displacement and to promote efficient investment an d regulatory policies, the following guidance shoul d be observed.
Base-Case Analysis . Constant-dollar benefit-cost analyses of proposed investments and regulations should report net present value and other outcomes determined usi ng a real discount rate of 7 percent. This rate app roximates the marginal pretax rate of return on an average in vestment in the private sector in recent years. Sig nificant changes in this rate will be reflected in future up dates of this Circular. 1.

Other Discount Rates . Analyses should show the sensitivity of the disco unted net present value and other outcomes to variations in the discount rate. The im portance of these alternative calculations will dep end on the specific economic characteristics of the program un der analysis. For example, in analyzing a regulator y proposal whose main cost is to reduce business investment, n et present value should also be calculated using a higher discount rate than 7 percent. 2.

Analyses may include among the reported outcomes th e internal rate of return implied by the stream of benefits and costs. The internal rate of return is the disco unt rate that sets the net present value of the pro gram or project to zero. While the internal rate of return does not ge nerally provide an acceptable decision criterion, i t does provide useful information, particularly when budgets are c onstrained or there is uncertainty about the approp riate discount rate.
Using the shadow price of capital to value benefits and costs is the analytically pr eferred means of capturing the effects of government projects on resource allocati on in the private sector. To use this method accura tely, the analyst must be able to compute how the benefits an d costs of a program or project affect the allocati on of private consumption and investment. OMB concurrence is requ ired if this method is used in place of the base ca se discount rate. 3.

c. Cost-Effectiveness, Lease-Purchase, Internal Govern ment Investment, and Asset Sales Analyses . The Treasury's borrowing rates should be used as discou nt rates in the following cases:
Cost-Effectiveness Analysis . Analyses that involve constant-dollar costs shoul d use the real Treasury borrowing rate on marketable securities of comparable maturit y to the period of analysis. This rate is computed using the Administration's economic assumptions for the budge t, which are published in January of each year. A t able of discount rates based on the expected interest rates for the first year of the budget forecast is prese nted in Appendix C of this Circular. Appendix C is updated annually and is available upon request from OMB. Re al Treasury rates are obtained by removing expected in flation over the period of analysis from nominal Tr easury interest rates. (Analyses that involve nominal cost s should use nominal Treasury rates for discounting , as described in the following paragraph.) 1.

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 borrowing rates should be taken from the economic assumptions for the budg et. A table of discount rates based on these assump tions is presented in Appendix C of this Circular, which is updated annually. (Constant dollar lease-purchase a nalyses 2. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094should use the real Treasury borrowing rate, descri bed in the preceding paragraph.)

Internal Government Investments . Some Federal investments provide "internal" benef its which take the form of increased Federal revenues or decreased Federal cos ts. An example would be an investment in an energy- efficient building system that reduces Federal operating cost s. Unlike the case of a Federally funded highway (w hich provides "external" benefits to society as a whole) , it is appropriate to calculate such a project's n et present value using a comparable-maturity Treasury rate as a disc ount rate. The rate used may be either nominal or r eal, depending on how benefits and costs are measured. 3.

Some Federal activities provide a mix of both Feder al cost savings and external social benefits. For e xample, Federal investments in information technology can p roduce Federal savings in the form of lower adminis trative costs and external social benefits in the form of f aster claims processing. The net present value of s uch investments should be evaluated with the 7 percent real discount rate discussed in Section 8.b. unless the analysis is able to allocate the investment's costs between provision of Federal cost savings and external soci al benefits. Where such an allocation is possible, Federal cost savings and their associated investment costs may b e discounted at the Treasury rate, while the external social benefits and their associated investment co sts should be discounted at the 7 percent real rate.
Asset Sale Analysis . Analysis of possible asset sales should reflect t he following: 4. (a) The net present value to the Federal Government of holding an asset is best measured by discountin g its future earnings stream using a Treasury rate. The rate use d may be either nominal or real, depending on how e arnings are measured.
(b) Analyses of government asset values should expl icitly deduct the cost of expected defaults or dela ys in payment from projected cash flows, along with gover nment administrative costs. Such analyses should al so consider explicitly the probabilities of events tha t would cause the asset to become nonfunctional, im paired or obsolete, as well as probabilities of events that w ould increase asset value.
(c) Analyses of possible asset sales should assess the gain in social efficiency that can result when a government asset is subject to market discipline and private i ncentives. Even though a government asset may be us ed more efficiently in the private sector, potential privat e-sector purchasers will generally discount such an asset's earnings at a rate in excess of the Treasury rate, in part, due to the cost of bearing risk. When there is evid ence that government assets can be used more efficiently in t he private sector, valuation analyses for these ass ets should include sensitivity comparisons that discount the r eturns from such assets with the rate of interest e arned by assets of similar riskiness in the private sector.

9. Treatment of Uncertainty . Estimates of benefits and costs are typically unc ertain because of imprecision in both underlying data and modeling assumptions. Because s uch uncertainty is basic to many analyses, its effe cts should be analyzed and reported. Useful information in such a report would include the key sources of uncertaint y; expected value estimates of outcomes; the sensitivity of res ults to important sources of uncertainty; and where possible, the probability distributions of benefits, costs, and n et benefits.

a. Characterizing Uncertainty . Analyses should attempt to characterize the sourc es and nature of uncertainty. Ideally, probability distributions of potential ben efits, costs, and net benefits should be presented. It should be recognized that many phenomena that are treated as deterministic or certain are, in fact, uncertain. I n analyzing uncertain data, objective estimates of probabilitie s should be used whenever possible. Market data, su ch as private insurance payments or interest rate differentials, may be useful in identifying and estimating relevan t risks. Stochastic simulation methods can be useful for analyzing such phenomena and developing insights into the relevan t probability distributions. In any case, the basis for the proba bility distribution assumptions should be reported. Any limitations of the analysis because of uncertainty or biases surro unding data or assumptions should be discussed. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094b. Expected Values . The expected values of the distributions of benef its, costs and net benefits can be obtained by

weighting each outcome by its probability of occurr ence, and then summing across all potential outcome s. If estimated benefits, costs and net benefits are characterized by point estimates rather than as probability distr ibutions, the expected value (an unbiased estimate) is the approp riate 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 b e clearly presented. For any such estimate, the ana lysis should identify the nature and magnitude of any bias. For example, studies of past activities have documented tendencies for cost growth beyond initial expectations; analyses s hould consider whether past experience suggests tha t initial estimates of benefits or costs are optimistic.

c. Sensitivity Analysis . Major assumptions should be varied and net presen t value and other outcomes recomputed to determine how sensitive outcomes are to changes in the assumptions. The assumptions that deserve th e most attention will depend on the dominant benefit and c ost elements and the areas of greatest uncertainty of the program being analyzed. For example, in analyzing a retirem ent program, one would consider changes in the numb er of beneficiaries, future wage growth, inflation, and t he discount rate. In general, sensitivity analysis should be considered for estimates of: (i) benefits and costs; (ii) the discount rate; (iii) the general inflation rate; an d (iv) distributional assumptions. Models used in the analysis should be well documented and, where possible, available to f acilitate independent review.

d. Other Adjustments for Uncertainty . The absolute variability of a risky outcome can b e much less significant than its correlation with other significant determinants of social welfare, such as real national income. I n general, variations in the discount rate are not the appropriate method of adjusting net present value for the special ris ks of particular projects. In some cases, it may be possible to esti mate certainty-equivalents which involve adjusting uncertain expected values to account for risk.

10. Incidence and Distributional Effects . The principle of maximizing net present value of benefits is based on the premise that gainers could fully compensate the los ers and still be better off. The presence or absenc e of such compensation should be indicated in the analysis. W hen benefits and costs have significant distributio nal effects, these effects should be analyzed and discussed, alo ng with the analysis of net present value. (This wi ll not usually be the case for cost-effectiveness analysis where the scope of government activity is not changing.)

a. Alternative Classification . Distributional effects may be analyzed by groupin g individuals or households according to income class (e.g., income quintiles), geographi cal region, or demographic group (e.g., age). Otherclassifications, such as by industry or occupation, may be appropria te in some circumstances.
Analysis should aim at identifying the relevant gai ners and losers from policy decisions. Effects on t he preexisting assignment of property rights by the program under analysis should be reported. Where a policy is inte nded to benefit a specified subgroup of the population, such as the poor, the analysis should consider how effective t he policy is in reaching its targeted group.

b. Economic Incidence . Individuals or households are the ultimate recipi ents of income; business enterprises are merely intermediaries. Analyses of distribution sho uld identify economic incidence, or how costs and b enefits are ultimately borne by households or individuals.
Determining economic incidence can be difficult bec ause benefits and costs are often redistributed in unintended and unexpected ways. For example, a subsidy for the pro duction of a commodity will usually raise the incom es of the commodity's suppliers, but it can also benefit cons umers of the commodity through lower prices and red uce the incomes for suppliers of competing products. A subs idy also raises the value of specialized resources used in the production of the subsidized commodity. As the subs idy is incorporated in asset values, its distributi onal effects can change. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a09411. Special Guidance for Public Investment . This guidance applies only to public investments with social benefits

apart from decreased Federal costs. It is not requi red for cost-effectiveness or lease-purchase analys es. Because taxes generally distort relative prices, they impos e a burden in excess of the revenues they raise. Re cent studies of the U.S. tax system suggest a range of values for t he marginal excess burden, of which a reasonable es timate is 25 cents per dollar of revenue.

a. Analysis of Excess Burdens . The presentation of results for public investment s that are not justified on costsaving grounds should include a supplementary analy sis with a 25 percent excess burden. Thus, in such analyses, costs in the form of public expenditures should be multiplied by a factor of 1.25 and net present valu e recomputed.

b. Exceptions . Where specific information clearly suggests that the excess burden is lower (or higher) than 25 percent, analyses may use a different figure. When a different figure is used, an explanation should b e provided for it. An example of such an exception is an investment fu nded by user charges that function like market pric es; in this case, the excess burden would be zero. Another exam ple would be a project that provides both cost savi ngs to the Federal Government and external social benefits. If it is possible to make a quantitative determinatio n of the portion of this project's costs that give rise to Federal savi ngs, that portion of the costs may be exempted from multiplication by the factor of 1.25.

12. Special Guidance for Regulatory Impact Analysis . Additional guidance for analysis of regulatory po licies is provided in Regulatory Program of the United States Government which is published annually by OMB. (See "Regulatory Impact Analysis Guidance," Appendix V o f Regulatory Program of the United States Government for April 1, 1991 to March 31, 1992.)
13. Special Guidance for Lease-Purchase Analysis . The special guidance in this section does not app ly to the decision to acquire the use of an asset. In decidin g that, the agency should conduct a benefit-cost an alysis, if possible. Only after the decision to acquire the services of an asset has been made is there a need to analyze t he decision whether to lease or purchase. a. Coverage . The Circular applies only when both of the follow ing tests of applicability are satisfied:
The lease-purchase analysis concerns a capital asse t, (including durable goods, equipment, buildings, facilities, installations, or land) which: 1.
(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 thre e years, and leased to the Federal Government for aterm of 75 percent or more of the economic life of the asset; or,
(c) Is built for the express purpose of being lease d to the Federal Government; or,
(d) Is leased to the Federal Government and clearly has no alternative commercial use (e.g., a special -purpose government installation).
The lease-purchase analysis concerns a capital asse t or a group of related assets whose total fair mar ket value exceeds $1 million. 2.

b. Required Justification for Leases . All leases of capital assets must be justified as preferable to direct government purchase and ownership. This can be done in one of three ways:
By conducting a separate lease-purchase analysis. T his is the only acceptable method for major acquisi tions. A lease represents a major acquisition if:
(a) The acquisition represents a separate line-item in the agency's budget; 1.

(b) The agency or OMB determines the acquisition is a major one; or 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094(c) The total purchase price of the asset or group of assets to be leased would exceed $500 million.

By conducting periodic lease-purchase analyses of r ecurrent decisions to lease similar assets used forthe same general purpose. Such analyses would apply to the e ntire class of assets. OMB approval should be sough t in determining the scope of any such generic analysis. 2.

By adopting a formal policy for smaller leases and submitting that policy to the OMB for approval. Fol lowing such a policy should generally result in the same lease-pu rchase decisions as would conducting separate lease -purchase analyses. Before adopting the policy, it should be demonstrated that: 3.

(a) The leases in question would generally result i n substantial savings to the Government that could not be realized on a purchase;
(b) The leases are so small or so short-term as to make separate lease-purchase analysis impractical; and
(c) Leases of different types are scored consistent ly with the instructions in Appendices B and C of O MB Circular No. A-11.

c. Analytical Requirements and Definitions . Whenever a Federal agency needs to acquire the us e of a capital asset, it should do so in the way that is least exp ensive for the Government as a whole.
Life-Cycle Cost . Lease-purchase analyses should compare the net di scounted present value of the life-cycle cost of leasing with the full costs of buying or constru cting an identical asset. The full costs of buying include the asset's purchase price plus the net discounted present valu e of any relevant ancillary services connected with the purchase. (Guidance on the discount rate to use forlease-purchase analysis is in Section 8.c.) 1.

Economic Life . For purposes of lease-purchase analysis, the econ omic life of an asset is its remaining or productive lifetime. It begins when the asset is ac quired and ends when the asset is retired from serv ice. The economic life is frequently not the same as the use ful life for tax purposes. 2.

Purchase Price . The purchase price of the asset for purposes of l ease-purchase analysis is its fair market value, defined as the price a willing buyer could reasonab ly expect to pay a willing seller in a competitive market to acquire the asset. 3.

(a) In the case of property that is already owned b y the Federal Government or that has been donated o r acquired by condemnation, an imputed purchase price should b e estimated. (Guidance on making imputations is pro vided in Section 13.c.(6).).
(b) If public land is used for the site of the asse t, the imputed market value of the land should be a dded to the purchase price.
(c) The asset's estimated residual value, as of the end of the period of analysis, should be subtracte d from its purchase price. (Guidance on estimating residual va lue is provided in Section 13.c.(7).)

Taxes . In analyzing the cost of a lease, the normal paym ent of taxes on the lessor's income from the lease should not be subtracted from the lease costs since the no rmal payment of taxes will also be reflected in the purchase cost. The cost to the Treasury of special tax benef its, if any, associated with the lease should be ad ded to the cost of the lease. Examples of such tax benefits might i nclude highly accelerated depreciation allowances o r tax-free 4. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094financing.

Ancillary Services . If the terms of the lease include ancillary servi ces provided by the lessor, the present value of the cost of obtaining these services separately sho uld be added to the purchase price. Such costs may be excluded if they are estimated to be the same for b oth lease and purchase alternatives or too small to affect the comparison. Examples of ancillary services include: 5.

(a) All costs associated with acquiring the propert y and preparing it for use, including construction,

installation, site, design, and management costs.

(b) Repair and improvement costs (if included in le ase payments).
(c) Operation and maintenance costs (if included in lease payments).
(d) Imputed property taxes (excluding foreign prope rty taxes on overseas acquisitions except where act ually paid). The imputed taxes approximate the costs of providin g municipal services such as water, sewage, and pol ice and fire protection. (See Section (6) below.)
(e) Imputed insurance premiums. (See Section (6) be low.)
Estimating Imputed Costs . Certain costs associated with the Federal purchas e of an asset may not involve a direct monetary payment. Some of these imputed cost s may be estimated as follows. 6.

(a) Purchase Price . An imputed purchase price for an asset that is al ready owned by the Federal Government or which has been acquired by donation or condemnation should be based on the fair market value of simila r properties that have been traded on commercial mark ets in the same or similar localities. The same met hod should be followed in estimating the imputed value of any Federal land used as a site for the asset.
(b) Property Taxes . Imputed property taxes may be estimated in two wa ys.
(i) Determine the property tax rate and assessed (t axable) value for comparable property in the intend ed locality. If there is no basis on which to estimate future changes in tax rates or assessed values, th e first- year tax rate and assessed value (inflation adjusted foreach subsequent year) can be applied to all years. Multiply the assessed value by the tax rate to determine the annual imputation for property taxes. (ii) As an alternative to step (i) above, obtain an estimate of the current local effective property t ax rate from the Building Owners and Managers Association's Regional Exchange Reports. Multiply the fair market value o f the government-owned property (inflation adjusted for e ach year) by the effective tax rate.
(c) Insurance Premiums . Determine local estimates of standard commercial coverage for similar property from the Building Owners and Managers Association's Regional Exchange Reports.

Residual Value . A property's residual value is an estimate of the price that the property could be sold for at the e nd of the period of the lease-purchase analysis, measu red in discounted present value terms.
(a) The recommended way to estimate residual value is to determine what similar, comparably aged prope rty is currently selling for in commercial markets. 7. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094(b) Alternatively, book estimates of the resale val ue of used property may be available from industry or government

sources.
(c) Assessed values of similar, comparably aged pro perties determined for property tax purposes may al so be used.
Renewal Options . In determining the term of a lease, all renewal o ptions shall be added to the initial lease period. 8. 14. Related Guidance

. OMB Circular No. A-11,"Preparation and Submission o f Annual Budget Estimates." a.
OMB Circular No. A-19,"Legislative Coordination and Clearance." b.

OMB Circular No. A-70,"Federal Credit Policy." c.

OMB Circular No. A-76,"Performance of Commercial Ac tivities." d.

OMB Circular No. A-109,"Policies to Be Followed in the Acquisition of Major Systems." e.
OMB Circular No. A-130,"Management of Federal Infor mation Resources." f.

"Joint OMB and Treasury Guidelines to the Departmen t of Defense Covering Lease or Charter Arrangements for Aircraft and Naval Vessels." g.

Executive Order 12291, "Federal Regulation." h.

"Regulatory Impact Analysis Guidance," in Regulatory Program of the United States Government

. i.

"Federal Energy Management and Planning Programs; L ife Cycle Cost Methodology and Procedures," j.

Federal Register, Vol. 55, No. 17, January 25, 1990 , and Vol. 55, No. 224, November 20, 1990. k.

Presidential Memorandum of April 29, 1992, "Benefit s and Costs of Legislative Proposals." l. 15. Implementation . Economic analyses submitted to OMB will be review ed for conformity with Items 5 to 13 in this Circular, through the Circular No. A-11 budget just ification 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 Circu lar should be addressed to the Office of Economic Policy, Office of Management and Budget (202-395-58 73 ) or, in the case of regulatory issues and analysis , to the Office of Information and Regulatory Affairs (202-3 95-4852 ).

APPENDIX A DEFINITION OF TERMS 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094Benefit-Cost Analysis -- A systematic quantitative method of assessing t he desirability of government projects or

policies when it is important to take a long view o f future effects and a broad view of possible side- effects. Capital Asset -- Tangible property, including durable goods, equ ipment, buildings, installations, and land.
Certainty-Equivalent -- A certain (i.e., nonrandom) outcome that an ind ividual values equally to an uncertain outcome. For a risk-averse individual, the certaint y-equivalent for an uncertain set of benefits may b e less than the mathematical expectation of the outcome; for exampl e, an individual may value a 50-50 chance of winnin g $100 or $0 as only $45. Analogously, a risk-averse individual may have a certainty-equivalent for an uncertain se t of costs that is larger in magnitude than the mathematical expectati on of costs.

Cost-Effectiveness -- A systematic quantitative method for comparing the costs of alternative means of achieving the same stream of benefits or a given objective.
Consumer Surplus -- The maximum sum of money a consumer would be wi lling to pay to consume a given amount of a good, less the amount actually paid. It is rep resented graphically by the area between the demand curve and the price line in a diagram representing the consumer's demand for the good as a function of its price.

Discount Rate -- The interest rate used in calculating the prese nt value of expected yearly benefits and costs.

Discount Factor -- The factor that translates expected benefits or costs in any given future year into present value terms. The discount factor is equal to 1/(1 + i ) t where i is the interest rate and t is the number of years from the date of initiation for the program or policy until the give n future year.

Excess Burden -- Unless a tax is imposed in the form of a lump s um unrelated to economic activity, such as a head tax, it will affect economic decisions on the margi n. Departures from economic efficiency resulting fr om the distorting effect of taxes are called excess burdens because t hey disadvantage society without adding to Treasury receipts. This concept is also sometimes referred to as deadweight loss.
External Economy or Diseconomy -- A direct effect, either positive or negative, o n someone's profit or welfare arising as a byproduct of some other person's or fi rm's activity. Also referred to as neighborhood or spillover effects, or externalities for short.

Incidence -- The ultimate distributional effect of a tax, ex penditure, or regulatory program.

Inflation -- The proportionate rate of change in the general price level, as opposed to the proportionate incre ase in a specific price. Inflation is usually measured by a broad-based price index, such as the implicit defla tor for Gross Domestic Product or the Consumer Price Index.

Internal Rate of Return -- The discount rate that sets the net present val ue of the stream of net benefits equal to zero. The internal rate of return may have multiple value s when the stream of net benefits alternates from n egative to positive more than once.
Life Cycle Cost -- The overall estimated cost for a particular pro gram alternative over the time period corresponding to the life of the program, including direct and in direct initial costs plus any periodic or continuin g costs of operation and maintenance.
Multiplier -- The ratio between the direct effect on output o r employment and the full effect, including the eff ects of second order rounds or spending. Multiplier effects greater than 1.0 require the existence of involunt ary unemployment. 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094Net Present Value -- The difference between the discounted present v alue of benefits and the discounted present

value of costs.

Nominal Values -- Economic units measured in terms of purchasing power of the date in question. A nominal value reflects the effects of general price inflation.

Nominal Interest Rate -- An interest rate that is not adjusted to remove the effects of actual or expected inflation. Market interest rates are generally nominal interes t rates.
Opportunity Cost -- The maximum worth of a good or input among poss ible alternative uses.

Real or Constant Dollar Values -- Economic units measured in terms of constant pu rchasing power. A real value is not affected by general price inflation. Real value s can be estimated by deflating nominal values with a general price index, such as the implicit deflator for Gross Dome stic Product or the Consumer Price Index.

Real Interest Rate -- An interest rate that has been adjusted to remo ve the effect of expected or actual inflation. Real interest rates can be approximated by subtracting t he expected or actual inflation rate from a nominal interest rate. (A precise estimate can be obtained by dividing one pl us the nominal interest rate by one plus the expect ed or actual inflation rate, and subtracting one from the result ing quotient.)

Relative Price -- A price ratio between two goods as, for example , the ratio of the price of energy to the price of equipment.

Shadow Price -- An estimate of what the price of a good or inpu t would be in the absence of market distortions, su ch 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 o f consumption.

Sunk Cost -- A cost incurred in the past that will not be af fected by any present or future decision. Sunk cost s should be ignored in determining whether a new investment is worthwhile.
Transfer Payment -- A payment of money or goods. A pure transfer is unrelated to the provision of any goods or services in exchange. Such payments alter the distr ibution of income, but do not directly affect the a llocation of resources on the margin.
Treasury Rates -- Rates of interest on marketable Treasury debt. Such debt is issued in maturities ranging from 91 days to 30 years.
Willingness to Pay-- The maximum amount an individual would be willi ng to give up in order to secure a change in the provision of a good or service.

APPENDIX B ADDITIONAL GUIDANCE FOR DISCOUNTING 1. Sample Format for Discounting Deferred Costs and Be nefits
Assume a 10-year program which will commit the Gove rnment to the stream of real (or constant-dollar) e xpenditures appearing in column (2) of the table below and whic h will result in a series of real benefits appearin g in column (3). The discount factor for a 7 percent discount rate i s shown in column (4). The present value cost for e ach of the 10 years is calculated by multiplying column (2) by co lumn (4); the present value benefit for each of the 10 years is 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a094calculated by multiplying column (3) by column (4). The present values of costs and benefits are prese nted in columns

(5) and (6) respectively.

YEAR SINCE INITIATION RENEWAL OR EXPANSION (1) EXPECTED

YEARLY COST (2) EXPECTED

YEARLY BENEFIT (3) DISCOUNT

FACTORS FOR 7% (4) PRESENT VALUE

OF COSTS COL. 2 X COL. 4 (5) PRESENT VALUE

OF BENEFITS COL. 3 X COL. 4 (6) 1 $10.00 $ 0.00 0.9346 $ 9.35 $0.00 2 20.00 0.00 0.8734 17.47 0.00 3 30.00 5.00 0.8163 24.49 4.08 4 30.00 10.00 0.7629 22.89 7.63 5 20.00 30.00 0.7130 14.26 21.39 6 10.00 40.00 0.6663 6.66 26.65 7 5.00 40.00 0.6227 3.11 24.91 8 5.00 40.00 0.5820 2.91 23.28 9 5.00 40.00 0.5439 2.72 21.76 10 5.00 25.00 0.5083 2.54 12.71 Total $106.40 $142.41

NOTE: The discount factor is calculated as 1/(1 + i ) t where i is the interest rate (.07) and t is the year.
The sum of column (5) is the total present value ofcosts and the sum of column (6) is the total prese nt value of benefits. Net present value is $36.01, the differen ce between the sum of discounted benefits and the s um of discounted costs.

2. End-of-Year and Mid-Year Discount Factors
The discount factors presented in the table above a re calculated on the implicit assumption that costs and benefits occur as lump sums at year-end. When costs and bene fits occur in a steady stream, applying mid-year di scount factors is more appropriate. For instance, the firs t cost in the table may be estimated to occur after six months, rather than at the end of one year to approximate better a steady stream of costs and benefits occurring overthe first year. Similarly, it may be assumed that all other costs a nd benefits are advanced six months to approximate better a continuing steady flow.
The present values of costs and benefits computed f rom the table above can be converted to a mid-year discounting basis by multiplying them by 1.0344 (the square roo t of 1.07). Thus, if the above example were convert ed to a midyear basis, the present value of costs would be $11 0.06, the present value of benefits would be $147.3 1, and the net present value would be $37.25.

3. Illustrative Discount Factors for Discount Rate of 7 percent

Year since Initiation, Renewal or Expansion Year-end Discount Factors Mid-year Discount Factors Beginning-of-year Discount Factors 1 0.9346 0.9667 1.0000 2 0.8734 0.9035 0.9346 3 0.8163 0.8444 0.8734 

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12/11/2013 http://www.whitehouse.gov/omb/circulars_a0944 0.7629 0.7891 0.8163 5 0.7130 0.7375 0.7629 6 0.6663 0.6893 0.7130 7 0.6227 0.6442 0.6663 8 0.5820 0.6020 0.6227 9 0.5439 0.5626 0.5820 10 0.5083 0.5258 0.5439 11 0.4751 0.4914 0.5083 12 0.4440 0.4593 0.4751 13 0.4150 0.4292 0.4440 14 0.3878 0.4012 0.4150 15 0.3624 0.3749 0.3878 16 0.3387 0.3504 0.3624 17 0.3166 0.3275 0.3387 18 0.2959 0.3060 0.3166 19 0.2765 0.2860 0.2959 20 0.2584 0.2673 0.2765 21 0.2415 0.2498 0.2584 22 0.2257 0.2335 0.2415 23 0.2109 0.2182 0.2257 24 0.1971 0.2039 0.2109 25 0.1842 0.1906 0.1971 26 0.1722 0.1781 0.1842 27 0.1609 0.1665 0.1722 28 0.1504 0.1556 0.1609 29 0.1406 0.1454 0.1504 30 0.1314 0.1359 0.1406

Appendix C Discount Rates for Cost-Effectiveness, Lease-Purcha se, and Related Analyses for OMB Circular No. A-94
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