Document ID: EPA-R06-OAR-2010-0190-0114
Agency: epa
Document Type: Supporting & Related Material
Title: 
Posted Date: 2012-05-12T04:00Z

Federal Agency Benefit-Cost Analysis Principles and Standards for Social
Programs

1.0 Introduction

When conducting benefit-cost analysis (BCA), federal agencies must
comply with federal guidelines outlined by various regulations and
guidelines from the Office of Management and Budget, White House, and
Congress. The main guidelines include OMB Circulars A-4, A-11, A-94, as
well as the White House’s Executive Order 12866. In this section, we
summarize each of these documents and present the relevant components
necessary for BCA. The complete OMB circulars, the Executive Order and
other documents referred to in this document can be found on the
Benefit-Cost Center website at    HYPERLINK
"http://www.evans.washington.edu/research/centers/benefit-cost-analysis/
related-search" \t "_blank" 
http://www.evans.washington.edu/research/centers/benefit-cost-analysis/r
elated-search . 

Within the guidelines of the OMB circulars and the White House Executive
Order, federal agencies are free to develop departmental for BCA
guidelines. In section 2, we summarize BCA guidelines for social
programs and explore departments and agency principles and standards for
BCA. Because not all federal agencies provide social programs (and by
extension BCA of social programs), we limit our analysis of federal
agencies to the following:

U.S. Department of Justice

Department of Housing and Urban Development

Department of Health and Human Services

Department of Education

1.1 OMB Circular A-4

The most recent OMB Circular A-4 was released on September 17, 2003 with
intent to provide guidance to analysts in regulatory agencies as
required under Section 6(a)(3)(c) of Executive Order 12866, as well as
the Regulatory Right-to-Know Act of 1999 and the “Regulatory Planning
and Review”. Circular A-4 replaces previous OMB “best practices”
document of 1996 as well as OMB Memorandum M-00-08. It also is meant to
provide a standardized measure and report costs and benefits for Federal
regulatory analysis.

OMB Circular A-4 provides the following guidelines for conducting BCA
for Federal regulatory agencies:

Explain how the actions required by the rule are linked to the expected
benefits. For example, indicate how additional safety equipment will
reduce safety risks. A similar analysis should be done for each of the
alternatives.

Identify a baseline. Benefits and costs are defined in comparison with a
clearly stated alternative. This normally will be a “no action”
baseline: what the world will be like if the proposed rule is not
adopted. Comparisons to a “next best” alternative are also
especially useful. 

Identify the expected undesirable side-effects and ancillary benefits of
the proposed regulatory action and the alternatives. These should be
added to the direct benefits and costs as appropriate (OMB Circular A-4
p. 2).

Specifically pertaining to non-monetized benefits and costs, OMB
Circular A-4 states that:

…the most efficient alternative will not necessarily be the one with
the largest quantified and monetized net-benefit estimate. In such
cases, you should exercise professional judgment in determining how
important the non-quantified benefits or costs may be in the context of
the overall analysis. If the non-quantified benefits and costs are
likely to be important, you should carry out a “threshold” analysis
to evaluate their significance. Threshold or a “break-even” analysis
answers the question, “How small could the value of the non-quantified
benefits be (or how large would the value of the non-quantified costs
need to be) before the rule would yield zero net benefits?” In
addition to threshold analysis you should indicate, where possible,
which non-quantified effects are most important and why (OMB Circular
1-4 p. 2).

On discount rates, the OMB Circular refers to OMB Circular A-94 noting
that a real discount rate of 7 percent should be used as a
“base-case” for regulatory analysis (p. 33). It also notes that the
7 percent discount rate “is an estimate of the average before-tax rate
of return for private capital in the U.S. economy” (p. 33).
Furthermore, the circular states that when regulation directly
influences private consumption it is pertinent to use a 3 percent
discount rate (i.e., the social rate of time preference). When
discounting intergenerationally, the circular states that the discount
rate should be between 1 to 3 percent, and when pertinent, a sensitivity
analysis should be conducted using discount rates of 3 to 7 percent. 
More information on OMB Circular A-94 can be found in section 1.3 below.

Further information on specific guidelines for conducting BCA can be
found in the Circular from pages 14-42.

1.2 OMB Circular A-11

OMB Circular A-11 includes exhibit 300 which requires federal agencies
to keep track of costs through various accounting methods. In
particular, exhibit 300 use is summarized as the following:

The exhibit 300 is one component of your agency’s total performance
budget justification (see section 51.2). OMB uses the exhibit 300 to
make both quantitative decisions about budgetary resources consistent
with the Administration’s program priorities, and qualitative
assessments about whether the agency’s programming processes are
consistent with OMB policy and guidance. OMB will be evaluating all
elements of the business cases and will communicate the results of these
evaluations in the course of the budget process. If additional
supporting information is necessary, OMB will request from agencies the
supporting evidence used to produce the exhibit 300. All information
necessary to complete an exhibit 300 should already exist as part of the
agency's overall Information Resources Management activities and within
project specific documentation. The materials used to produce the
exhibit 300 should be readily available to OMB upon request (OMB
Circular A-11 p. 581).

Exhibit 300 is pertinent because these costs will be used when
conducting BCA for a program. 

Another section of A-11 that is pertinent to BCA is the Earned Value
Management (EVM) project management tool. Regarding EVM, OMB Circular
A-11 states:

Earned value management (EVM) is a project (investment) management tool
effectively integrating the investment scope of work with schedule and
cost elements for optimum investment planning and control. The qualities
and operating characteristics of earned value management systems (EVMS)
are described in American National Standards Institute (ANSI)/Electronic
Industries Alliance (EIA) Standard –748–1998, Earned Value
Management Systems, approved May 19, 1998. It was reaffirmed on August
28, 2002. 

In evaluation work, EVM estimated costs are used, and again, is
pertinent to BCA in this regard.

1.3 OMB Circular A-94

OMB Circular A-94 establishes guidelines and discount rates for benefit
cost analysis within federal agencies.  This document replaces OMB
Circular A-94 (from 1972) and A-104 (from 1986) and draws authority from
the Budget Accounting Act of 1921.  The states purpose is to “promote
efficient resource allocation through well informed decision making by
the Federal Government”. 

Broadly, this document outlines the technique to use in BCA.   The
sections most pertinent to social programs are 5-10 and are summarized
below.

Section 5 identifies the general concept of CBA and discusses the
difference between Net Present Value (NPV), Cost Effectiveness Analysis
(CEA), and the elements within NPV and CEA.  These elements are: policy
rational, explicit assumptions, evaluation of alternatives and
verification.

Section 6 presents federal policy on how to identify and enumerate
benefits and costs.

Section 7 discusses how to treat inflation and outlines the differences
between real and nominal values.

Section 8 discusses the difference between real and nominal discount
rates.  This section identifies which type of discount rate should be
used with the types of analysis in Section 5.

Section 9 discusses the role of uncertainty in CBA modeling assumptions.
 Guidelines are given for characterizing uncertainty, expected values
and sensitivity analysis.

Section 10 discusses incidence and distributional effects.  The process
of targeting recipients of benefits leads to a discussion of how to
measure impacts across diverse groups.  Effectiveness should be measured
in terms of the target group receiving benefits. 

1.4 Executive Order 12866

Executive Order 12866 is the original executive order to mandate that
federal agencies conduct cost benefit analysis for significant
regulatory actions.  The preamble identifies the philosophy and methods
of the order:

EO. 12866 is designed to “maximize health, safety, environment and
well-being and improve the performance of the economy without imposing
unacceptable or unreasonable costs on society”.  The goals of EO 12866
are operationalized by “enhancing planning and coordination with
respect to both new and existing regulations”.

The body of the order is organized into 11 sections.  Of these sections
1-3 address social issues inherent in cost benefit analysis and are
summarized below.  Section 4 outlines the planning mechanism of the
order.  Sections 5 and 6 outline exemptions and review.  Sections 7
establishes protocols for resolving conflicts.  Sections 8-11 address
publication, agency authority, judicial review and revocations.

Section 1 identifies the goals, procedures and the population to be
included in cost benefit analysis. “In deciding whether and how to
regulation, agencies should assess all costs and benefits of available
regulatory alternatives, including the alternative of not regulating.”
The definition of costs and benefits include social values and costs
difficult to quantify. “Costs and benefits shall be understood to
include both quantifiable measures and qualitative measures of costs and
benefits that are difficult to quantify”

When conducing cost benefit analysis the agency must include (Sec 1. B.
4) “risks posed” (Sec 1. B. 5) “distributive impacts, and
equity” by regulator options. 

Section 2 states that review of compliance with E.O. 12866 shall be
conducted by the Office of Management and Budget (OMB).

Section 3 limits the type of regulations subject to E.O. 12866 to only
“significant regulatory actions”. These actions are defined as (Sec
3. F. 1) “having an annual effect on the economy of $100 millon
more… or adversely affect the environment, public health or safety”.

1.5 Table Summary

Table 1 below presents a brief summary of the pertinent OMB circulars
and White House Executive Order 12866, while table 2 provides a summary
of other laws and regulations that pertain to BCA or components of BCA.

Table 1: Baseline Federal Agency BCA Principles and Standards

White House Office of Management and Budget

Circular A-4	Provides guidelines and requirements for conducting BCA for
analysts in regulatory agencies

Refers to OMB Circular A-94 for specific discount rates

Circular A-11	Requires federal agencies to train staff in Earned Value
Management (EVM) for estimating costs

Exhibit 300 pertinent for accounting methods

Circular A-94	Establishes guidelines and discount rates for benefit cost
analysis within federal agencies.

Reviews CBA methods

Establishes discount rates

Identifies uncertainty

Discusses distributional effects

		White House

Executive Order 12866	The organic order

Establishes philosophy motivating use of BCA

Defines “significant regulatory actions”

Defines the population to be considered for costs and benefits

Table 2: Other pertinent laws and regulations

Law or regulation	Summary

Clinger-Cohen Act of 1996	Requires that federal agencies purchase
technology as a private enterprise and that all acquisition, planning
and management of technology be treated as a “capital investment”

All facets of capital planning are used just as in private industry, and
these include:

Cost/benefit ratio

Expected life of technology

Flexibility and possibility of multiple uses

Regulatory Right-to-Know Act of 1999	Requires the OMB to provide an
annual report to Congress on the total benefits and costs of federal
regulatory programs, as well as recommendations for improving them.

Requires the OMB to report on the possible impact of federal regulations
on small business, the private sector, the government, wages, and
economic growth. 

Regulatory Flexibility Act of 1980	Federal agencies proposing rules or
regulations that would have a “significant” economic impact on small
businesses, small nonprofits, and small governmental organizations are
required to prepare a Regulatory Flexibility Analysis. 

Agencies must try to find a simpler and less burdensome method for small
organizations to comply with federal requirements

Budget and Accounting Act of 1921	Sec. 1111. 1. A.  Improving economy
and efficiency: To improve economy and efficiency in the United States
Government, the President shall make a study of each agency to decide,
and may send Congress recommendations, on changes that should be made in
the organization, activities, and business methods of agencies;

2.0 Federal Departments

2.1 U.S. Department of Justice

When conducting BCA, the U.S. Department of Justice (DOJ) has
departmental set of guidelines for different projects. For instance,
when conducting BCA for a feasibility study for the department’s
System Development Life Cycle Guidance Document (SDLC), the DOJ is
required to include a statement of assumptions that are made regarding
the present and future environments that the analysis is based on, as
well as constraints, nonrecurring and recurring costs, and an analysis
of tangible and intangible costs (U.S. DOJ p. 28).

More broadly, the department provides the following precautions for
studies conducting BCA:

Identifying and measuring all program costs and benefits. When important
benefits are disregarded because they cannot be measured or monetized,
the project may appear less efficient than it is; if certain costs are
omitted, the project will seem more efficient than it is, resulting in
misleading estimates.

Expressing costs and benefits in terms of monetary values. Expressing
all costs and benefits in terms of a common denominator, such as a
monetary value, may not capture the essence of the outcome. For example,
what value should be placed on providing treatment to child sexual abuse
(CSA) victims (NIH 2004 p. A-2)?

Regarding discount rates, the DOJ recommends for land valuation that
discount rates should be derived from and supported by direct market
data and cites the Federal Land Exchanges and Acquisitions: Appraisal
Issues and Applications (Uniform Appraisal). In general, however, the
USDOJ allows each department little guidance into specific discount
rates, and suggests that when conducting BCA researchers use the
“appropriate rate”.

2.2 Department of Housing and Urban Development

The Department of Housing and Urban Development provides some guidance
when conducting BCA. For instance, citing Hausman 1979, the department
recommends discount rates of approximately 25 for air conditioners. Of
course varying projects will use different discount rates, and further
information on discount rates can be found in the Housing Impact
Analysis (also available on the BCAC website). When looking at discount
rates for energy policy, HUD recommends the following considerations
when determining a discount rate:

The discount rate is a crucial parameter for projecting technology
investment levels or household adoption of new technologies such as
those involved in energy conservation. For example, discount rates
higher than prevailing interest rates in the credit market indicate
reluctance on the part of the consumer to invest in new technology.

The discount rate is an indicator of real estate market efficiency. In a
perfectly competitive market where technology is produced to match
buyer’s preferences, homebuyers should be willing to invest in new
technologies until the marginal value of the benefits equals the
marginal cost of the innovation. According to financial theory, the
appropriate rate of return would be the homebuyers’ opportunity cost
of capital. In thermal technologies if the lifetimes match that of the
house (such as insulation) and the benefit is net of taxes, the
appropriate opportunity interest rate may be equal to the after-tax
mortgage interest rate.

Household discount rates that are substantially higher than the
prevailing interest rate (e.g., after-tax mortgage rate), indicates
uncertainty due to: insufficient information for the homeowner,
appraiser, or lender; limitations of homeowner income; or other
imperfections in the real estate market. These imperfections could help
justify some modification of behavior or intervention such as
communication and education by the private sector acting alone, public
and quasi-public agencies, or interested non-profit associations.

Conversely, discount rates lower than opportunity cost might indicate
that homebuyers are viewing the added expenditures on new technology as
“consumers” rather than as pure investors. They might find that
additional functional or non-quantifiable benefit in attributes of a
technology, such as improved appearance or health, outweighs higher
price (U.S. HUD 2001 p. 12).

HUD uses their internal System of Development Methodology that includes
a CBA template as well as a CBA checklist (links to these documents can
be found on the BCAC website). Further information on HUD’s internal
System of Development Methodology can be found on their website, and a
link is also available on the BCAC website. In general, however, HUD
provides those conducting BCA in the agency leeway in deciding the most
appropriate discount rate given the analysis. 

2.3 Department of Health and Human Services

The Department of Health and Human Service (DHHS) refers to E.O. 12866
and Cir. A-4 in their online guidelines for BCA and CEA analysis.   DHHS
identifies when to conduct BCA and CEA given the nature of the federal
rulemaking.  From the A-4 the DHHS quotes:

"You should prepare a CEA for all major rulemakings for which the
primary benefits are improved public health and safety to the extent
that a valid effectiveness measure can be developed to represent
expected health and safety outcomes. 

You should also perform a BCA for major health and safety rulemakings to
the extent that valid monetary values can be assigned to the primary
expected health and safety outcomes. In undertaking these analyses, it
is important to keep in mind the larger objective of analytical
consistency in estimating benefits and costs across regulations and
agencies, subject to statutory limitations. Failure to maintain such
consistency may prevent achievement of the most risk reduction for a
given level of resource expenditure.

For all other major rulemakings, you should carry out a BCA. If some of
the primary benefit categories cannot be expressed in monetary units,
you should also conduct a CEA. In unusual cases where no quantified
information on benefits, costs and effectiveness can be produced, the
regulatory analysis should present a qualitative discussion of the
issues and evidence." 

Two other sources are identified to guide CBA and CEA in the DHSS. The
first of these is a study the OMB commissioned from the Institute of
Medicine (IOM).  The IOM study provides the agencies and OMB “useful
insight into how to improve the measurement of effectiveness of public
health and safety regulations”.

The second source is a workshop the OMB commissioned from Resources for
the Future (RFF).  The RFF workshop explored the implications of using
cost-effectiveness versus cost-benefit analysis in regulatory impact
analyses.  The RFF workshop included Cost-Utility Analyis (CUA) as a
tool to consider the appropriateness of alternative medical
interventions as well as to analyze health policy.

2.4 Department of Education

It appears the Department of Education has no internal guidelines but
does follow the guidelines set forth by the OMB. Further it appears that
outside contractors do not necessary conform to the OMB guidelines,
though this is not firmly established by us yet. 

7.0 Summary

Across federal agencies that conduct BCA it is evident that all follow
the OMB A-4, A-11, A-94, as well as E.O. 12866. Within each agency it
appears that there are loose recommendations for conducting BCA, and in
some instances, specific information such as discount rates are provided
for certain types of resources. It appears that when federal agencies
contract out BCA projects, they do not necessarily require that the BCA
follow the OMB and EO guidelines. Instead, it seems that the federal
agencies prefer that the contractors rely on the available literature on
certain types of BCA projects.  Within the confines of OMB A-4, A-11,
A-94 and E.O. 12866 federal agencies may use principals and standards
more appropriate to their agency.  These include choosing between BCA,
CUA and CEA.

References

Office of Management and Budget. (2003). Circular A-4: Regulatory
Analysis. Washington, DC.

Office of Management and Budget. (2008). Circular A-11: Preparation,
Submission, and Execution of the Budget. Washington, DC.

Office of Management and Budget. (1992). Circular A-94: Guidelines and
Discount Rates for Benefit-Cost Analysis of Federal Programs.
Washington, DC.

U.S. Department of Housing and Urban Development, Office of Policy
Development and Research. (2006). Housing Impact Analysis. Washington,
DC.

U.S. Department of Housing and Urban Development, NAHB Research Center,
Inc.. (2001). Housing Innovation and the Appraisal Process. Washington,
DC.

U.S. Department of Justice. (2000). Uniform Appraisal Standards for
Federal Land Acquisitions. Washington, DC.

U.S. Department of Justice, Office of the Inspector General, Audit
Division. (2007). Audit of the Department of Justice Information
Technology Studies, Plans, and Evaluations. Washington, DC. 

National Institute of Justice. (2004). A Resource for Evaluating Child
Advocacy Centers, Appendix A. Washington, DC.

White House. (1993). Executive Order 12866: Regulatory Planning and
Review. Washington, DC.

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Social Program BCA Guidelines 

Running head: Social Program BCA Guidelines