January 13 2021 0Comment

OMB Discount Rate Drops Below Zero

The Office of Management & Budget (OMB) has updated the discount rate for calendar year 2021, revealing that for the first time in history, the 30-year real discount rate is negative (-0.3%).

The discount rate published by OMB annually in Appendix C of OMB Circular No. A-94 is used by the Federal government and state agencies when performing cost effectiveness analyses (life cycle cost analyses) to account for the rate of change over time in the true value of money, taking into account fluctuations in both investment interest rates and the rate of inflation.

Through application of an appropriate real discount rate, the worth or value of all initial and future costs can be expressed in terms of constant dollars (i.e., in terms of the costs of those items as if they were incurred in the year in which the life‐cycle cost analysis is conducted). As per the OMB Circular, the published real discount rates are to be used for discounting such constant dollar flows, as is typically required in life-cycle cost analyses.

When used in a life-cycle cost analysis (LCCA) the real discount rate can have a major impact on the calculated total life-cycle cost or total ownership cost for a given project. High real discount rates tend to reduce the impact that high future expenditures have on the net present value of the alternate. Thus, it can be said that high real discount rates favor alternates that have low initial costs and high future costs (e.g. asphalt pavement), while low real discount rates favor alternates with higher initial costs and lower future costs (e.g. concrete pavements). The graph above illustrates an example (Taken from EB011 on Life-Cycle Cost Analysis) for a concrete and an asphalt alternate on a project where the initial cost of the asphalt is 33% less than that of the concrete (a large and in many cases unrealistic difference). But when future maintenance/preservation activities are accounted for over the 50-year analysis period, the concrete option clearly becomes the better option, especially in an economic environment that dictates a low discount rate. The example above only features agency costs, and concrete’s advantage would be further improved with the introduction of user costs.

Click here to access the Administration’s memo dated December 21, 2020, with the updated Appendix C. Click here to access current and past years’ discount rates. For more information on the impacts of the discount rate, please see A Tool for Better Pavement Investment and Engineering Decisions (EB-011).

ACPA has already reached out to our agency partners at FHWA and FAA about the OMB updated discount rates, and have encouraged them to share with their field staff and other relevant personnel.  We have also urged AASHTO to share with their State DOT members, and remind them that the current 30-year real interest rate (as published in this OMB appendix) is what should be used as a discount rate in life-cycle cost analyses (e.g. as noted in FHWA TA 5040.39 Section 6b). We’re also encouraging ACPA-affiliated Chapters to share this information with their state and local agency contacts.

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