The Federal Emergency Management Agency (FEMA) and Office of Management and Budget’s (OMB) recent change in the discount rate used in the agencies’ Hazard Mitigation grant programs will drastically lower one of the hurdles communities have to overcome to document how they will benefit from this kind of funding.
This change, which reduces the discount rate from 7 percent to 3.1 percent, is particularly beneficial for rural communities, tribal nations and lower income communities that regularly work with WSP.
What is a discount rate and what is benefit-cost analysis?
Benefit-cost analysis (BCA) is a quantitative assessment that compares the benefits of a hazard mitigation project to its costs. The discount rate is an economics term where future values are worth less than current values (i.e. discounted). By evaluating the disaster impacts avoided over a future period against the project's expenses today, BCA helps determine whether a project is ‘worth it’ and the benefits are greater than the costs. FEMA requires that benefits outweigh costs through the BCA before they will fund mitigation grants.
Five ways FEMA’s discount rate adjustment changes will help communities:
Improved cost-effectiveness
The reduction in the discount rate makes it easier for more communities to show financial benefits in the BCA over a project’s lifecycle, as lower discount rates do not reduce calculated impact costs the same way higher discount rates do, which results in an increase in the calculated benefit. This is critical for communities with lower property values, where impacts cost less and are therefore harder to justify under current guidance.
Equity for underserved communities
This guidance is intended to partially help level the playing field, allowing tribal nations and indigenous communities to access HMA and other FEMA grants more readily. Low-income communities, often facing unique vulnerabilities, will benefit significantly from this change.
FEMA also introduced distributional weights to enhance the cost effectiveness analysis. This means that communities that meet certain requirements, such as low-income, get more points in the FEMA tool. These weights automatically adjust the BCA results based on the household incomes of specific census tracts. Properties located in census tracts with incomes below the national median receive increased building replacement values through this measure. As a result, projects in disadvantaged communities can more easily qualify for mitigation grant funding.
Under the new policy, projects funded through FEMA’s HMA grant programs with a total cost of less than $1 million no longer require a full BCA. This streamlines the process, allowing smaller projects to move forward and reducing the technical burden of applying for funds.
FEMA has also updated pre-calculated benefit amounts for eligible projects. These pre-calculated benefits eliminate the need for separate BCAs, making it easier for specific projects like generators to demonstrate cost-effectiveness and reducing the burden of applying. The focus shifts from complex calculations to practical implementation.
FEMA’s decision to reduce the discount rate and implement policy changes demonstrates their commitment to supporting tribal nations and underserved communities. By streamlining the BCA process, these changes empower tribal governments to implement resilience initiatives effectively. Interested communities should contact their State Hazard Mitigation Officer, FEMA Region, or WSP for more information.
