4.3. SR 06-16-2003 - Laserfiche WebLink

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Review of Benefit-Cost Analysis of Northstar Commuter Rail 9 Discount rates-While MnDOT used a discount rate of 4.5 percent, Anton, Lubov used a rate of only 2.5 percent. A lower discount rate has the effect of making future benefits and coSts more important than otherwise. Because most of the costs of commuter rail are in the near future and most of the projected benefits are in the more distant future, the lower rate makes the investment appear more attractive. Anton, Lubov says that the lower rate increased benefits by $81 million and costs by only $43 million. Yet in reducing the rate, Anton, Lubov went in the wrong direction. According to the Federal Transit Administration, the appropriate rate for evaluating transit projects is not 2.5 or 4.5 percent, but 7.0 percent.7 At this higher rate, benefits would be reduced by more than costs, leading to an even lower return than calculated by MnDOT. Beyond this, it appears that Anton, Lubov does not understand how to use discount rates. With a lower rate, all values in the analysis should change, because all the benefits and costs take place some time in the future. Yet most of the benefits and costs presented by Anton, Lubov are identical to those calculated by MnDOT. Of the eight benefits or costs, five-the vehicle operating cost savings, vehicle accident rate savings, pollution cost savings, the value of depreciated capital stock, and the operating costs- are identical. The capital costs also differ only by $24 million, which Anton, Lubov's estimated cost of connecting the Hiawatha light rail to the Northstar commuter trains. This means Anton, Lubov used the same capital cost (and therefore the same discount rate) as MnDOT. Considering that all of these costs are in the future, they should all be different if a different discount rate is used. Even the capital costs would be spent over the next four years and therefore should be slightly different from the MnDOT costs. Clearly, Anton, Lubov did not correctly account for the change in discount rates. Without seeing MnDOT's and Anton, Lubov's spreadsheets, it is impossible to tell how this affects the analysis. However, since discount rates are fundamental to any benefit-cost analysis, this error does not reflect well on the analysis as a whole. Return to Minnesota-In addition to miscalculating the benefit-cost ratio of Northstar commuter rail, Anton, Lubov goes on to estimate "the return to the State of Minnesota." This is the alleged benefit of the commuter rail line divided by' the share of the cost paid by the state, as opposed to the federal government. This analysis is flawed in at least two ways.