Test cases sought for Cost Effectiveness Tool

By Michael Rodriguez

Smart Growth America has developed a new tool to help agencies decide which projects are most cost effective, and they are inviting transportation agencies to share past projects to help test this important tool. The tool allows communities to have a more transparent understanding of whether the long-range costs of a transportation project will be recovered via taxes and user fees, both with and without any state or federal subsidies.

Transportation projects are often justified on the basis of the economic benefits that they will provide to a local community. With this in mind, Smart Growth America has been working with several communities in developing a Cost Effectiveness Tool that helps agencies understand the long-run economic impacts of a project in comparison to the long-run costs.

A community may justify a project on economic development outcomes such as increasing jobs, stimulating economic activity, and increasing tax revenues, but it is worth considering if those outcomes create enough benefits to cover the cost of the project. Transportation agencies are thus required to both estimate state and local taxes induced by a transportation investment and compare them to the lifecycle costs.

An Example

Consider a highway interchange proposal in a rural community with an industrial zone. This project can be viewed as an economic development project, as the local community will posit that improvements to freight truck movements will reduce freight travel-time on the adjacent site. Specific corporations may have considered locating at the site or expanding a plant, promising new jobs.

Therefore, the state DOT, with support of the local community, would likely use these economic impacts as part of its project justification: the project will bring X jobs, increase gross regional product by Y dollars, boost property and sales taxes by Z dollars, and provide additional taxes generated from secondary “downstream” economic activity (suppliers, consumer spending, etc.). Furthermore, to sweeten the deal, the federal government, through the state DOT, will pay for part of this project. This “free money” makes the project that much more enticing.

What the Tool Does

The new tool attempts to answer the question: “Do the long-run revenues generated from project-related economic impacts offset the long-run project costs?”

While there are a plethora of consultants and transportation assessment tools out in the marketplace, no single tool analyzes the cost-effectiveness of the project in this way. Some tools offer benefit-cost analysis, which is a different analytical framework that considers non-fiscal benefits like the value of travel-time savings or the value of carbon emissions reductions.

Other tools may measure the economic impacts, and convert travel demand model results into impacts such as jobs, gross regional product, wages, and state and local taxes. However, no existing tool compares economic impacts to costs in a systematic way, and no tool asks communities to explicitly consider external subsidies.

The Cost Effectiveness Tool asks communities to input project capital and O&M costs, their best estimates of revenues generated from user fees and economic impacts (property, sales, and other taxes), and the federal and state subsidies.

Then the tool considers a 30-year project life-cycle, compares costs and revenues in a present-value basis with an appropriate discount rate, and can tell a community if a project is revenue-neutral or not.

The primary output is called the “cost effectiveness ratio,” which compares long-run project-related revenues to long-run project costs in a present value basis. Furthermore, the tool provides a cost-effectiveness ratio with and without external subsidies.

Uses of the Tool

This tool, and its outputs, are intended to inform project justification but not supplant a larger understanding of a project. Instead, it is one data point in a larger discussion of a project justification, which would include other assessments such as a benefit-cost analysis, political considerations, environmental impacts, and local community input.

If a project does not “pencil” by the measure of this tool, it does not mean that the project is not worthy. In that case, our tool allows communities to explicitly know that this is the case, and to proceed or not proceed with that in mind. The goal is to allow communities to have a more transparent understanding of how much they are paying to bring jobs or generate local revenues through transportation investments.

Furthermore, communities will have a greater understanding of the role that external subsidies play in the cost-effectiveness of their project. Is a project revenue-neutral on its own, or does its viability depend on federal subsidies? This is an important consideration as some communities are moving away from dependency on federal dollars and available federal funding is in flux.

We invite transportation agencies to share past projects with us to help us test this important tool. If your agency is interested in helping improve this tool, please contact Beth Osborn. SGA looks forward to eventually introducing this tool and framework to the full transportation community.

Michael Rodriguez, AICP is Director of Research for Smart Growth America