Benefit Cost Analysis for Flood Hazard Mitigation: The Federal Emergency Management Agency (FEMA) Method (selected excerpts from FEMA EMI Training Course)

FEMA does benefit-cost analysis to... Meet the statutory eligibility requirement. Meet the statutory eligibility requirement. Determine whether or not a project is worth doing. Determine whether or not a project is worth doing. Have a common basis on which to compare projects. Have a common basis on which to compare projects. Show that mitigation works. Show that mitigation works.

Section 404 (a) of the Stafford Act: “The President may contribute up to 75% of the cost of hazard mitigation measures which the President has determined are cost-effective and which substantially reduce the risk of future damage, hardship, loss or suffering in any area affected by a major disaster.”

44 CFR Part 206 Section (b) (5) (ii) “The Grantee must demonstrate (that the project is cost effective) by documenting that the project…will not cost more than the anticipated value of the reduction in both direct damages and subsequent negative impacts to the area if future disasters were to occur. Both costs and benefits will be computed on a net present value basis.”

TRUE or FALSE? “All well-designed mitigation projects reduce future damages and losses.”

TRUE or FALSE? “All well-designed mitigation projects reduce future damages and losses.”

TRUE or FALSE? “All well-designed mitigation projects reduce future damages and losses and thus all are cost-effective projects.”

TRUE or FALSE? “All well-designed mitigation projects reduce future damages and losses and thus all are cost-effective projects.”

Is It Worth $1 Million To...? 1. Protect one doghouse or one outhouse? 2. Protect one house that floods infrequently? 3. Protect a flood-prone hospital, city hall, school, and other important buildings? 4. Protect 150 flood- prone houses? Probably Not

Is It Worth $1 Million To...? Probably Not 1. Protect one doghouse or one outhouse? 2. Protect one house that floods infrequently? 3. Protect a flood-prone hospital, city hall, school, and other important buildings? 4. Protect 150 flood- prone houses?

Flood Hazard and Flood Risk x= FLOOD HAZARD (FREQUENCY & SEVERITY) FLOOD HAZARD (FREQUENCY & SEVERITY) Probability of Damaging Floods PROPERTY EXPOSED TO FLOODS PROPERTY EXPOSED TO FLOODS Value and Vulnerability of Property Exposed to Flood Hazard FLOOD RISK (DOLLARS) FLOOD RISK (DOLLARS) Severity of Threat to the Built Environment

Mitigation  Mitigation is an action taken specifically to eliminate or reduce the potential for FUTURE damages and losses from the hazard being addressed.

Cost-Effective  Cost-effective means: The benefits of a hazard mitigation project exceed the costs, or The benefits of a hazard mitigation project exceed the costs, or The benefit-cost ratio is greater than one. The benefit-cost ratio is greater than one.

The Benefit-Cost Model “Model” vs. “Modules” The MODEL is the MATH. The economic theory, hazard and risk assessment methods, and mathematical formulas on which FEMA bases the benefit-cost analysis of hazard mitigation projects. The MODULES are the SOFTWARE. FEMA’s software programs for conducting benefit-cost analysis. The benefit-cost modules are based on the benefit-cost model.

The Benefit-Cost Model B E N E F I T SB E N E F I T SB E N E F I T SB E N E F I T S C O S T SC O S T SC O S T SC O S T S = BC R A T I O

Mitigation Project Benefits: Definition  B E N E F I T S The expected avoided damages and losses over the lifetime of the mitigation project. The expected avoided damages and losses over the lifetime of the mitigation project.

Project Benefits Direct Damages and Losses Avoided Damages to buildings and other facilities such as infrastructure Damages to buildings and other facilities such as infrastructure Damages to contents Damages to contents Loss of function costs Loss of function costs Casualties Casualties Emergency management costs Emergency management costs

Project Benefits Indirect Damages NOT Considered Changes in gross regional economic product, incomes, or employment Changes in gross regional economic product, incomes, or employment Changes in future economic development or tourism Changes in future economic development or tourism Criminal justice system costs for disaster- related crime (e.g., looters) Criminal justice system costs for disaster- related crime (e.g., looters)

Mitigation Project Benefits  The project benefits calculation is based on four key elements: Flood frequency and severity Flood frequency and severity Damages and losses before mitigation Damages and losses before mitigation Damages and losses after mitigation Damages and losses after mitigation Economic factors including the discount rate and the mitigation project useful lifetime Economic factors including the discount rate and the mitigation project useful lifetime

The Benefit-Cost Model Flood Frequency and Severity FFE = 2,300’ 10-year flood = 2,302’ 100-year flood = 2,310’

Mitigation Project Benefits: Damages Before Mitigation Flood Depth (feet) Annual Probability of Flooding Scenario Damages and Losses Expected Annual Damages and Losses $ 6,400$1, $14,300$1, $24,500$2, $28,900$ $32,100$ $36,300$ 123 Total Expected Annual Damages and Losses $6,312

Flood Depth (feet) Annual Probability of Flooding Scenario Damages and Losses Expected Annual Damages and Losses $ $ $ $ $ 6,400$ $14,300$ 49 Total Expected Annual Damages and Losses $112 Mitigation Project Benefits: Damages After Mitigation

Mitigation Project Benefits: Annual Avoided Damages and Losses Flood Depth (feet) Expected Annual Damages Before Mitigation Expected Annual Damages After Mitigation Expected Annual Avoided Damages and Losses 0$1,312$ 0$1,312 1$1,765$ 0$1,765 2$2,124$ 0$2,124 3$ 673$ 0$ 673 4$ 315$63$ 252 5$ 123$49$ 74 Totals $6,312$112 $6,200

The Benefit-Cost Model Economics Terminology and Concepts N E T P R E S E N T V A L U E The value “today” of money that you will receive in the future. D I S C O U N T R A T E An interest rate used to determine the time value of money. For Federally funded mitigation projects, the discount rate is determined by the U.S. Office of Management and Budget (OMB).

NEVER NEVER factor inflation into estimates of future damages or benefits. The Benefit-Cost Model Economics Terminology and Concepts

P R O J E C T U S E F U L L I F E T I M E The estimated time period over which the mitigation project will maintain its effectiveness in preventing or reducing damages and losses from future disasters.

The Benefit-Cost Model Economics Terminology and Concepts P R E S E N T V A L U E C O E F F I C I E N T (PVC) The PVC expresses the combined effect of the discount rate and the project useful lifetime on the net present value of future benefits.

Mitigation Project Benefits: Benefit-Cost Analysis Results Expected Annual Benefits Present Value Coefficient Net Present Value of Future Benefits Costs Benefit- Cost Ratio $6, $76,942$20, $6,200 x = (PVC based on a 30-year project life and 7% discount rate)

Benefit-Cost Model Flood Depth (feet) Expected Annual Damages Before Mitigation Expected Annual Damages After Mitigation Expected Annual Avoided Damages and Losses $1,312 $1,765 $2,124 $ 673 $ 315 $ 123 $ 0 $63 $49 $1,312 $1,765 $2,124 $ 673 $ 252 $ 74 Totals$6,312$112$6,200 PVC (7% Discount Rate, 30 years) Net Present Value of Future Benefits$76,942 Costs$20,000 Benefit-Cost Ratio 3.85

The BC Modules  BC Analysis Modules: Full-Data (FD) Full-Data (FD) Limited-Data (LD) Limited-Data (LD) Very-Limited-Data (VLD) Very-Limited-Data (VLD)

The BC Modules Basis Data Required Accuracy LD Module VLD Module FD Module Engineering information and flood hazard data Historic damage data Damage data from 2 or more flood events Most Accurate (When flood hazard data available) Damage data from 1 flood event Accurate (Most accurate when flood hazard data unavailable) Site-specific project data and flood hazard data Least Accurate

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Dr. Shane Parson, PE, CFM Senior Project Associate Virginia Tech Center for Geospatial Information Technology 200 Patton Hall Blacksburg, VA Office: (540) Fax: (540) Website: