Coastal Services Center

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Evaluation of Federally Cost-Shared Projects: The National Economic Development and Regional Economic Development Perspectives

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Introduction

Beach nourishment projects that are sponsored by the U.S. Army Corps of Engineers (USACE), or by local governments that receive beach nourishment project cost reimbursement funds through the USACE, must comply with the requirements of the National Economic Development Act. Local decision makers must understand the basic nature of the NED costs as these are the costs that determine (a) which, if any, alternative plans are economically feasible, and (b) the basis for the local share, or non-federal portion of a beach nourishment projects' costs. National Economic Development (NED) is a planning principle articulated in the Principles and Guidelines for Water Resources and Land Conservation Implementation Studies (P&G) and was adopted by the Water Resources Council (48FR 10250) in 1983. The P&G, signed by James Watt in 1983, was "developed to guide the formulation and evaluation studies of the major Federal water resources development agencies" that govern the USACE's planning and review process in the design/development phase of a beach nourishment project seeking federal funding participation.

In Section 209 of the River and Harbor and Flood Control Act of 1970 (Public Law (91-611), Congress directed the Secretary of the Army (acting through the Chief of Engineers) to include enhancing regional economic development (RED), quality of the total environment (EQ), the well-being of people (OSE), and national economic development (NED) in the formulation and evaluation of Federally funded water resource projects.

Federal investments in civil works projects require evaluation from the national point of view. For example, an investment that results in a benefit to North Carolina could provide an equal disbenefit to Tennessee, totaling a net national benefit of zero; thus would not be in the nation's best interest. Some RED benefits can occur without corresponding disbenefits elsewhere in the nation. Those RED benefits are also NED benefits. Some RED benefits are partially offset by disbenefits elsewhere in the nation. In those cases, only the net increase is counted as an NED benefit. (Refer to the "National Economic Development Procedures Manual -- Overview Manual for Conducting National Economic Development Analysis, October 1991, IWR Report 91-R-11). For example, the non-Federal sponsors of a beach nourishment project in Myrtle Beach may be perfectly happy to spend $1 million dollars of state funds for a project that results in a $2 million gain to the residents of South Carolina. If, however, the total project cost is $4 million with the Federal government picking up the rest of the tab, and if half the benefits of the projects are offset by a disbenefit in North Carolina (if, for example, tourism benefits in SC were simply a transfer of benefits that would have occurred in NC), then the project is not worthwhile from the standpoint of NED. In this example, the benefit-cost ratio from the RED standpoint (ignoring, for simplicity, the effects of discounting, etc.) is 2:1, but the benefit-cost ratio from the NED standpoint is 0.125:1.

The Principles and Guidelines for Water Resources and Land Conservation Implementation Studies (P&G) was adopted by the Water Resources Council (48FR 10250) in 1983 and reflects the current policy basis for federal funding of shore protection (i.e. beach nourishment) projects. The P&G provides "Administration Guidelines" for the U.S. Army Corps of Engineers (USACE) formulation and evaluation of a project for federal cost participation. This applies to all water resource agencies, but has been implemented only by the USACE. Prior to the adoption of the P&G (1983), the Standards and Procedures for Water and Related Land Resources Planning (PS&P) provided Administrative "Rules" described/codified in the Code of Federal Regulations. According to the WRC (48-FR10251), "The purpose of the change from regulations to guidelines is to keep the focus on the performance of appropriate planning and analysis. Uniform, professionally accepted procedures form the general basis of the planning process". An organizational chart for the structure of USACE Headquarters and the USACE Planning Section within the Civil Works Office structure is shown in Figures 1 and 2.

The current policy of the federal government (P&G) is that of a single federal objective, the national economic development (NED) plan, and does not specify other plans that must be considered in the array of alternatives that make the decision. However, the P&G does specify four types of economic impacts that must be evaluated in selecting the "Preferred Plan" including NED, Environmental Quality (EQ), regional economic development (RED) and other social effects (OSE). Another Federal objective of water and related land resources project planning is to "contribute to national economic development consistent with protecting the Nation's environment, pursuant to national environmental statutes, applicable executive orders, and other Federal planning requirements."

Four accounts are established to facilitate evaluation and display of the effects of each alternative plan considered during the Feasibility Study Phase and Reconnaissance Phase. These accounts are: national economic development (NED), environmental quality (EQ), regional economic development (RED), and other social effects (OSE). The RED account evaluates the regional incidence of the NED effects, such as income transfers and employment effects.

Plan Selection and the NED Benefits

The Federal objective in beach nourishment is to maximize the net benefits to the nation that result from these projects. Cost sharing is a policy-driven aspect of the program, but total national project expenditures (federal and nonfederal) are compared with total national benefits regardless of to whom they accrue, whether government/private beneficiaries, to determine economic viability and justification. The overall objectives of the Federal Government's role in cost sharing on beach nourishment projects are the national economic development (NED) benefits that the nation will receive from the project to justify the need for and, therefore, the federal cost participation in a project (refer to companion paper "Economic Analysis of Geographic Benefits by Income Level and By Beneficiary Group").

Quantification of a project's regional economic development (RED) benefits are important in demonstrating that the project is also worthwhile when considered from various non-federal points of view. Moreover, the importance of evaluating and thus distinguishing between the types of RED benefits is to determine which are, and which are not, included as a NED benefit. For example NED benefits accrue when there is an increase in local resident or tourist spending as the result of the Project and within the Project's local region. A tourist is generally defined as a visitor who lives outside the project's region. As an example, an RED benefit would result if a resident travels from outside the region (i.e. different county or town) to the location of the beach enhancement project to buy lunch at a beach restaurant or to recreate at the beach. However, this would not result in an NED benefit.

If, as a result of a beach nourishment project, there is increased visitation or enhanced beach experience, then there is an increase in the value of services provided by the beach resulting in both an RED and an NED benefit for the project, as discussed further in companion paper "Economic Analysis of Geographic Benefits by Income Level and Beneficiary Group." This is considered a national economic development (NED) benefit to the extent that this increase in value is not offset by a decrease in the value of services provided by beaches elsewhere in the area (i.e. nation), as occurs when for example tourists who would have visited another beach visit a recently nourished beach instead. The NED benefits measure the increased value provided by beaches, including storm damage reduction benefits, recreational benefits and other benefits such as reduced emergency and facility maintenance costs. Increased goods or services sold such as increased market value for properties, consumer surplus, and producer surplus that result from beach nourishment are a NED benefit.

Additionally, for a project's plan to be economically justifiable the benefit-to-cost ratio must be greater than 1.0 with the exception that the Assistant to the Secretary of the Army may grant approval if deemed warranted due to special circumstances. Such plans may include projects with ecosystem restoration benefits only, or ecosystem and shore protection damage reduction benefits. For these cases, the plan yielding the greatest net sum of benefits is to be selected. A positive benefit-to-cost ratio indicates that the dollar value of the benefits received from all categories of economic benefit must exceed the projected project costs. Typically, project planners seek to maximize the net NED benefits and thus the benefit-to-cost ratio is not usually maximized. A more complete explanation of NED benefits computational methodology is given in the USACE Report ER 1105-2-100, 22 Apr 2000, Chapter 2 for a fuller explanation. This is available at http://www.iwr.usace.army.mil/iwr/products/reports/reports.htm.

Total project benefits and total project costs are determined on an annual basis for the design life of the project (typically 30 to 50 years). NED costs are always expressed on an average annual basis so that the costs can be directly compared to project benefits, which are also estimated on an average annual basis over the design life of the Project. If the average annual costs exceed the average annual benefits, then the project is deemed economically feasible.

Justifying the Federal Cost Share

The project design that is the "best" or the "preferred plan" of the local sponsor may or may not be in the federal interest because of the effect of economic transfers. However, when a project is in the federal and local interest, a USACE civil works "joint venture" becomes possible.

Cost participation by the federal government requires a multi-step approval process for Project formulation and evaluation that commences with a Reconnaissance Study. The approval responsibilities and studies that define the federal planning process are described in Table 1. It is important to recognize that a local or non-federal project sponsor will customarily follow similar planning and design development steps for their beach nourishment projects, whether federal cost participation is or is not expected. As seen in Table 1, the procedures framed for federal planning studies are detailed and specific in terms of the preferences to specific analysis methodologies. The steps in the federal process are to: identify the problem, develop project purpose and goals; inventory and forecast critical resources (physical, demographic, economic, social, etc); identify and formulate alternative plans to address the problem; evaluate the costs and benefits for each alternative plan and identify and quantify the NED costs; compare alternative plans, and; select a plan.

Non-Federal Cost Share Participation

In addition to providing the basis for project justification, the identification and quantification of project benefits provides planners with a basis for allocating project costs among beneficiaries and, in many instances, for determining eligibility for project cost-sharing with state and federal governments. For example, at the present time, beach nourishment projects are eligible for maximum federal cost sharing only if the hurricane and storm damage reduction (HSDR) benefits comprise more than 50 percent of the total project benefits along a beach reach. Specific methodologies for computation of the dollar value of benefits are reviewed in much greater detail elsewhere.

recreational benefits

Prior to 1986, beach nourishment projects were primarily justified for federal participation based on their recreational benefits. A good example of such a project is the Miami Beach Nourishment Project. Prior to restoration, this area had lost considerable tourist dollars due to a severely eroded shoreline. The 1986 Water Resources Development Act (WRDA) changed the weighting of benefits recognizing HSDR as the primary purpose of federal participation in beach nourishment projects. When the primary purpose is HSDR, then the cost sharing for beach nourishment projects is a maximum of 65% federal and 35% nonfederal. HSRD benefits must account for at least half of the total benefits required to justify the project or federal government will not share the project costs for that shoreline reach. As described in ER 1105-2-100: "Single purpose shore protection projects are formulated to provide hurricane and storm damage reduction. The highest priority is for reducing damages to existing development. Reducing flooding on, or erosion to, undeveloped lands is not a high priority; and Federal participation in protection of privately owned, undeveloped shores, will not be pursued. Recreation is an incidental benefit, thus the current administration policy is for the federal government to participate in single purpose projects formulated exclusively for hurricane and storm damage reduction, with economic benefits equal to or exceeding the costs, based solely on damage reduction benefits, or a combination of damage reduction benefits and recreational benefits. The current administration policy requires that recreation be incidental in the formulation process and may comprise no more than fifty percent of the total benefits for justification. If this criterion for participation is met, all recreational benefits can be included in the benefit-to-cost analysis. Costs incurred for other than hurricane and damage reduction purpose, i.e. to satisfy recreation demand, are a 100 percent non-Federal responsibility." Although recreational benefits are a recognized economic reality in the Corps guidance and policy, it is not a high priority output.

If the recreational benefits are separable from the plan and the HSDR benefits result in a benefit-to-cost ratio (BCR) greater than one, the cost sharing for the projects will be distributed as 50% federal and 50% non-federal. Table 2 provides five different cases as examples of differing federal participation in shore protection (beach nourishment) projects that include recreation facilities or generate recreational benefits.

Hurricane and Storm Damage Reduction (HSDR) Benefits

A wide beach provides measurable economic benefits to public and private entities, by protecting the property (tax base, business revenues, etc.) from losses or destruction due to storms. In general, the total HSDR benefit attributed to a particular property is determined from the sum of anticipated costs to protect the property and the dollar-value of land and buildings from damage due to storms and, or erosion in the absence of beach nourishment. Virtually all HSDR benefits are NED benefits because the repair or replacement of damaged property requires resources that could have been employed elsewhere in the nation.

Along beaches fronting privately owned properties, there must be sufficient public access to justify federal participation as dictated by past and present administrative policy. Damages to private homes on private beaches are NED losses, but for various reasons the federal government has decided to limit its participation in protecting such properties. Thereby, to qualify as a shoreline reach eligible for federal cost participation, there must be a public access every quarter mile, or a half-mile if sufficient pubic access exists within the beach segment. Losses of undeveloped, private property for HSDR are 100% non-federal cost-shared. Undeveloped public property is cost-shared according to the governmental ownership.

Specific categories of HSDR benefits considered include:

• Land loss prevention due to normal long-term erosion and storms
• Upland structure damage/loss prevention (damage frequency curve)
• Erosion Control Structures Damage Reduction
• Public safety (for example, protection of roads)
• Benefits to downdrift properties (applies for some projects)

Multi-Purpose Projects (Combining Projects)

Several factors limit the Federal planning and selection of larger project, multi-purpose projects that result from combining projects. Figure 2 illustrates the federal framework and methodology (6 step planning and study process) that must be followed to select the "alternative" plan that results in the greatest NED benefits and the Federal division of offices according to project purpose (for example navigation versus shore protection). The Federal policy that requires the "Preferred or Selected" Alternative Project results in total benefits that equal or exceed the NED benefits, and often precludes combining of projects into larger, multi-purpose projects. For example, the Preferred Plan for a navigation project will be restricted as to the "disposal" site and thereby placement of quality dredged spoil associated with maintenance dredging for a navigation projects onto beaches, or combining navigation and shore protection projects. There has been a shift in the Federal policy concerning the value of sediment dredged from the maintenance of navigation projects. Dredge material was historically referred to as dredge spoil however, in the past two years this terminology is has been changed to dredge material and the USACE has begun expansion of the Regional Sediment Management Program. Thus, the USACE is beginning to participate in other multipurpose projects formulated for both ecosystem restoration and hurricane storm damage reduction where the benefit-to-cost ratio would otherwise be less than one. The Wilmington District of the USACE recently completed a Sea Turtle Habitat Restoration Project at Oak Island, North Carolina. This project included more than 2 million cubic yards of sand placed along an eroding shoreline that provides habitat for sea turtle nesting in a low-density developed shoreline area.

Summary

Historically, beach nourishment projects have been justified based upon the total value of the storm damage reduction and recreational benefits. Determination of NED project benefits is essential to obtain and maximize the federal cost sharing for a project and to make legally defensible decisions about the equitable allocation of project costs to state and local authorities. Federal policy limits specify that recreation is a low priority output. For projects where recreational benefits are less than 50% of total benefits, or when a project is formulated for other primary purposes and the average annual recreational benefits are less than 50% of project costs, such benefits are considered incidental. This is equivalent to saying that the recreations benefits, which are required for project justification (i.e. to result in a positive benefit-to-cost ratio), must be less than an amount equal to 50% of project costs. Thus, in evaluating federal participation the primary benefit must be HSDR benefits with recreation secondary, or incidental.

Current federal policy requires that hurricane and storm damage reduction benefits account for at least one-half of the total project benefits in order for a project to be eligible for federal funding. There is movement afoot by organizations such as the American Coastal Coalition and the American Shore and Beaches Association, to revise the law to give recreational benefits the same weight as HSDR benefits. However, into the foreseeable future, costs for projects that are not eligible for federal funding are expected to increase and must be distributed to project stakeholders or beneficiaries in accordance with funding policies at the state and local level.

References

Greeley-Polhemus Group, June 1993. National Economic Development Procedures Manual Nation Economic Development Costs, U.S. Army Corps of Engineers, IWR Report 93-R-12.

P&G, Water Resources Council (48FR 10250), 1983. Economic and Environmental Principles and Guidelines for Water Resources and Land Conservation Implementation Studies. Federal Publication.

PS&P, December 1979 and revised September 1980, Federal Publication, 1980. Standards and Procedures for Water and Related Land Resources Planning.

U.S. Army Corps of Engineers, July 1999. Engineering Pamphlet 1165-2-1. Headquarters, Washington D.C.

U.S. Army Corps of Engineers, 1989. Engineering Regulation 1165-2-130. Headquarters, Washington D.C.

U.S. Army Corps of Engineers, April 2000. Engineering Regulation 1105-2-100, 22. Headquarters, Washington D.C.

U.S. Congress, November 17, 1986. Water Resources Development Act of 1986, PL99-662.