Disagreement persists about the use of BCAs in decisionmaking, how benefits and costs are captured and monetized, and how to value future benefits and costs. The debate on how to value future benefits and costs is related to the discount rate used to value future benefits and costs in the present. The higher the discount rate, the less present value is attributed to future benefits and costs. In the Water Resources Development Act of 1974 (WRDA 1974; P.L. 97 from 1962. For FY2016, the water planning discount rate was 3.125%. This report discusses the role and significance of discount rates in the economic evaluation of Corps projects. It also discusses the history of, theoretical underpinning for, and issues and criticisms of the water planning discount rate. The discount rate applied can influence which alternative for addressing a water resources problem is deemed most economically efficient and whether a BCA indicates that a project's net benefits justify federal investment. The quality and reliability of the BCAs shape the quality of decisionmaking and the efficacy of the federal and nonfederal spending on federal water resource projects. Today, Congress is faced with more demand for Corps projects than the agency can deliver at recent funding levels. Whereas the Corps uses the water planning discount rate for project planning, in recent years, the executive branch has chosen to use a different discount rate when selecting Corps construction projects to include in its annual budget request. Since the mid-2000s, the executive branch's approach to budgeting, known as performance-based budgeting, has focused its funding requests on a limited set of projects. The executive branch uses as a principal performance metric for a project's inclusion in its budget request the project's benefit-cost ratio (BCR) calculated with a 7% discount rate (i.e., ratio of the present value of benefits to the present value of costs discounted at 7%). Projects with BCRs less than 2.5 (calculated at a 7% discount rate) are largely excluded. An issue for Congress and nonfederal project sponsors is the uncertain prospects for construction for the suite of congressionally authorized projects that do not meet the executive branch's BCR threshold. The OMB federal program discount rate is intended to reflect the pretax rate of return on capital in the private sector. Since the late 1990s, the water planning discount rate has been below the OMB federal program discount rate. For many Corps stakeholders, the current interest in the water planning discount rate is less a function of these long-standing debates and more part of the concern about the uncertain construction funding prospects for congressionally authorized projects that are below the BCR (at 7% discount rate) threshold used by the executive branch. Water Planning Discount Rate

		History of the Water Planning Discount Rate

As previously noted, since 1974, the Corps and other federal water resource agencies have evaluated water projects using a discount rate that is calculated using a formula required in law. In 1962, S.Doc. In practice, the rate is the average year yield on government securities with 15 years or more to maturity. For many Corps stakeholders, the current interest in the water planning discount rate is less a function of long-standing debates about a long-critiqued discount rate and more part of the concern over the uncertain construction prospects for the suite of congressionally authorized projects that do not meet the executive branch's BCR threshold. Corps benefit-cost analyses and their underlying assumptions, especially the discount rate, are of significance to Congress and other policymakers because of their central role in decisions currently shaping the portfolio of federal water resources assets and their benefits, costs, and risks for decades to come. Water resource projects are explicitly exempted from Circular A-94.
Since 1936, Congress has relied on benefit and cost information to justify investments of federal involvement in water resource projects of the U.S. Army Corps of Engineers (Corps). Today, Congress faces more demand for Corps projects than the agency can deliver at recent funding levels. Congress also faces stakeholder concerns about how water resources issues are addressed; this brings attention to how the Corps develops and evaluates the alternatives considered for congressional construction authorization. Corps benefit-cost analyses (BCAs) and their underlying assumptions are central to decisions currently shaping the portfolio of federal water resources assets and their benefits, costs, and risks for decades to come. The quality and reliability of the BCAs shape federal decisionmaking and the efficacy of federal and nonfederal spending on federal water resource projects.
Disagreement persists about the use of BCAs in decisionmaking, how benefits and costs are captured and monetized, and how to value future benefits and costs. A main element of the debate is the discount rate used to convert future benefits and costs into present values. For some projects, the discount rate applied can influence which alternative is deemed the most economically efficient and whether a project's net benefits appear to justify federal investment. The higher the discount rate, the less present value is attributed to future benefits and costs. The Water Resources Development Act of 1974 (WRDA 1974; P.L. 93-251) requires the executive branch to use an annually adjusted water planning discount rate for project planning. The Corps continues to use the water planning discount rate for planning; however, in recent years, the executive branch has chosen to use a different discount rate when selecting Corps construction projects to include in its annual budget request. The executive branch's approach to budgeting has focused its funding requests on a limited set of projects. The executive branch uses as a principal performance metric for a project's inclusion in its budget request the project's benefit-cost ratio (BCR, ratio of the present value of benefits to the present value of costs), calculated with a 7% discount rate. Projects with BCRs less than 2.5 (calculated at a 7% discount rate) are largely excluded from the budget request. An issue for Congress and nonfederal project sponsors is the uncertain prospects for construction for the suite of congressionally authorized projects that do not meet the executive branch's BCR threshold.
Pursuant to WRDA 1974, the water planning discount rate is calculated annually based on a formula established in S.Doc. 97 from 1962; the rate was 3.125% in FY2016. The calculation uses the average yield on Treasury securities with 15 years or more remaining to maturity, rounded to the nearest one-eighth of 1% and capped at an annual change of 0.25%.
The executive branch has used a 7% discount rate for its evaluation of most federal programs since 1992, pursuant to Office of Management and Budget (OMB) Circular A-94. According to the circular, the 7% rate is intended to reflect the pretax rate of return on capital in the private sector. Since the late 1990s, the water planning discount rate has been below 7%.
Critics of the water planning discount rate have argued for a rate that better reflects the opportunity cost of capital. Others argue that Corps projects are public investments with long-term benefits that are appropriately evaluated with a low discount rate. For many Corps stakeholders, the current interest in the water planning discount rate is less a function of these long-standing debates and more part of the concern about the uncertain construction funding prospects for congressionally authorized projects that are below the BCR at the 7% discount rate threshold used by the executive branch. This report discusses the role and significance of discount rates in the economic evaluation of Corps projects. It also discusses the water planning discount rate's history, theoretical underpinning, and related issues and criticisms.