Equity Matters: A New Approach to Valuing Flood Risk Mitigation
This article is part of Stock and Flow, a series offering insights from our economics, statistics and finance team about issues facing water projects.
The economic evaluation of projects and policies is at a watershed moment. Last year, the White House Office of Management and Budget revised its benefit-cost analysis guidelines and recognized weighted BCA as a reasonable approach to account for the distribution of benefits and costs to people. A weighted BCA can be computed from standard BCA results by estimating and applying weighting factors. HDR has developed a process to implement this concept called Social Equity Value Analysis, or SEVA, which is discussed further in detail below.
A weighted BCA sheds new light on the societal value of a project based on who benefits and by how much. The approach is gaining traction with federal agencies. Significantly, OMB’s BCA guidelines now indicate that weighted BCA results can be used to justify project implementation, even if the monetized results of a standard BCA suggested otherwise. Earlier this year, the U.S. Army Corps of Engineers raised the potential use of distributional weights in project evaluations in its draft Agency Specific Procedures, which provide a framework for investment decisions for proposed water resource projects. The Federal Emergency Management Agency has also adopted weighted BCA principles in their BCA Toolkit software that will make it easier for projects in disadvantaged communities to be eligible for grant funding.
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Federal, state and local agencies are increasingly looking to incorporate equity in project evaluations, and a weighted BCA can be a relevant contribution to support prioritizing projects. For instance, USACE project evaluations could incorporate weighted BCA as a value-for-money measure as part of its Other Social Effects account alongside its BCA-based National Economic Development account. In this article, we outline some of the key characteristics of a weighted BCA, our experience in applying the method in a flood risk context and the opportunities for expanding the perspective of project value.
What is a weighted BCA?
A weighted BCA produces a value-for-money project perspective that is similar to a standard BCA but with an additional dimension: the value that a project provides to people relative to their incomes. This value draws from a large body of economic research that indicates the value of money declines as an individual’s income increases. Intuitively, a low-income individual would place greater value on getting more money compared to someone with an already high income. In a project application, economic theory extends this concept to recognize that the monetized values of project outcomes increase for people with lower incomes. That means, in a flood risk reduction context, a lower-income individual would value reduced flood risk more than someone with a high income. These economic findings make practical sense given that those with lower incomes would likely be more vulnerable to losses and face greater challenges in recovering from damage to their property or source of income.
Our Experience
As of today, the process of implementing weighted BCAs has not been formulated into a series of steps and guidelines. In the fall of 2021, HDR funded a research fellowship to establish sound, transparent methods for implementing weighted BCAs that would be fully consistent with federal BCA guidelines on distributional analyses. As part of this effort, we convened a panel of leading academics including federal, state and local economists and engineers to support the development of methods, particularly for infrastructure. This research effort culminated in a process for implementing a weighted BCA that incorporates income distribution with already estimated benefits and costs, an approach that we call SEVA. We have applied SEVA on several different types of projects in the transportation, water, energy and broadband sectors. In some examples, SEVA has supported local agencies in obtaining federal funding through competitive grant programs.
Where has our approach been applied?
We applied our SEVA approach to a project intended to mitigate flooding in the Yuba-Feather basin in Northern California. The flood risk zone includes urban areas such as Marysville and Yuba City, growing communities like Plumas Lake and rural areas with prime agricultural acreage for growing rice and tree crops. According to the California Department of Water Resources, roughly 106,500 acres and 162,000 people are at risk of flooding in the region.
We worked with the Yuba Water Agency to prepare a FEMA grant to support their proposed Atmospheric River Control Spillway Project. The project will be a new second spillway that will improve the dam’s operational flexibility, reduce flood risk, enhance dam safety and strengthen the regions’ resilience to climate change. The federal government and the State of California designated many portions of Yuba County and the surrounding region as “economically disadvantaged” and as environmental justice communities, due in part to economic and environmental conditions resulting from a long history of catastrophic flooding.
Through our FEMA grant work, we conducted a standard BCA for the ARC Spillway. YWA was interested in going further and to better understand weighted BCA methods and how results might change. We applied SEVA to account for incomes of the study area’s residents in Butte, Sutter and Yuba Counties. Many of those affected by the project have relatively low incomes. With SEVA, the benefit-cost ratio nearly tripled in magnitude compared to standard BCA results. Certainly, not every weighted BCA will have the same change in magnitude of net benefits since the results depend on the underlying income distribution of project beneficiaries; however, for projects that specifically target the interests and needs of lower income individuals, a weighted BCA should be performed to reveal a more complete measure of societal value.
“When analyzing the impacts of a generational project such as the ARC Spillway, it’s critical to fully understand how the project will benefit the specific communities that the project was designed to protect,” said John James, Directory of Resource Planning, Yuba County Water Agency. “Benefits from the ARC Spillway construction and operation have unique characteristics that are not always accounted for in traditional BCA calculations. With a weighted BCA approach, the true value of this project to Yuba County and our region can be more comprehensively evaluated and communicated to our stakeholders.”
He continued, “By incorporating the value of money to people at different income levels, the ARC Spillway is shown to capture substantially greater benefits to those in our community, minimizing the risk of life-altering flood impacts and enhancing resiliency in a changing climate.”
What are the decision-making implications?
While this article has focused on weighted BCA in a flood risk context, its use is widely applicable to many forms of infrastructure projects and policy, especially where beneficiaries differ by income levels. Weighted BCA can certainly be considered jointly with neighborhood-scale socioeconomic indicators to better communicate distributional characteristics of projects and determine their best use of available funds. In some cases, the results of the analysis can reveal a positive social value for implementing a project, even if benefits measured in standard ways are below project costs. Now, as OMB’s BCA guidelines and USACE’s draft ASP indicate, weighted BCAs, like SEVA, can become the basis for justifying project funding. In this context, federal, state and local agencies are exploring ways of computing weighted BCAs and considering the implications for project funding and policymaking.
Going forward, we expect that weighted BCA will become more common in project and policy evaluations. We recognize that decisions may be more challenging for agencies when they are presented with two measures of a project’s value: standard BCA and weighted BCA methods. However, because weighted BCA can reveal greater value for those with greater needs, that is a good challenge to have.
