Introduction
The LMPDS Study Team initially selected a 50-year planning horizon over which potential damages and other factors should be evaluated. The selection of a 50-year value for estimating anticipated future losses was arbitrary. Considerable debate can occur about the legitimacy of forecasting economic conditions even beyond 4-5 years into the future, although public investments in hazard damage reduction require reasonable estimates of annualized benefits/disbenefits. Local economic decision-making is highly susceptible to regional, national and even international factors. Land use trends, construction of shore protection and changes in riparian uses all can significantly affect the reliability of estimates of benefit/disbenefit. The life-span of structural protection measures varies considerably by type. The degree of maintenance of these structures also profoundly impacts economic estimates. Land use management practices, such as set-back restrictions, vary considerably from state to state and over time.
To investigate this further, the LMPDS Study Team contracted with the Planning and Zoning Center to assess the implications of using a 50-year planning horizon on the relevant uses of the potential damage estimates for the 5 prototype counties being examined in 1999.
The principal purpose of the work conducted under this task included:
- assessing the implications of using a 50 year planning horizon on the relevant uses of the potential damage estimates for the two prototype counties
- identifying other planning horizons and comparing the implications of using them to the implications of using a 50 year planning horizon
- recommending a planning horizon
In order to accomplish these purposes, it was necessary to:
- identify the principal uses of the potential damage estimates
- identify the principal uses of the planning time horizons
- create a simple model of the land uses along the Lake Michigan shoreline and likely structural and nonstructural responses by property owners and governments to extended high and extended low water levels
Principal Uses of the Potential Damage Estimates
The phrase "potential damage estimates" refers to calculations of economic damage that may occur from a variety of lake level situations over a period of time. As a practical matter, the continuum of potential lake level combinations (high, low, average, or alternating high and low), will most often only create a severe damage situation if there is: 1) a sustained period of either high or low lake levels, 2) a rapid shift from a prolonged period of low-to-high or high-to-low levels, or 3) a period of many severe storms at any lake level. In order for potential damage estimates to be of much value, they must relate to a range of responses to high and low lake level situations. In this way, the information on potential damages will be available to be used as a key decision input or variable in formulating measured responses to a period of prolonged high or low lake levels.
Identifying the widest range of potential uses of the potential damage estimates requires also identifying potential audiences that would be interested in the information. Listed below are a range of audiences likely to be interested in potential damage estimates and what their interest (or use) of the information would likely be.
- Federal Government
- State Government
- Local Government
- Riparians and Floodplain Owners
- Shore Protection Dealers
- Boaters
- Realtors and Developers
- Policy Advocates/Analysts/Consultants
- Environmental Organizations
- Business Organizations
- Citizens in General
With these potential audiences in mind, the likely "inevitable uses" of potential damages information fall into two main categories: 1) planning, budgeting, policy and regulatory uses; and 2) potential costs to shoreline and floodplain owners.
In the planning, budgeting, policy and regulatory uses arena, potential damage estimates would be a key piece of information to consider when formulating or evaluating proposals to:
- Install shore protection at public expense along especially, long stretches of shorelines
- Change regulations to permit broader installation of private shore protection
- Adopt new regulations concerning building setback or moving structures at high risk from erosion of the shoreline
- Regulate lake levels so as to prevent long periods of high or low levels
- Dredge channels and harbors when lake levels are low
- Replace or reconstruct key public facilities, like roads, damaged or closed by erosion caused by high lake levels
- Consider shoreline and floodplain property purchases as an alternative to either structural or regulatory alternatives.
Most of the rest of the interest in estimated damages information will come from existing or potential property owners (or to persons providing information or other services to them) who will want to know potential costs so that:
- Existing shoreline or floodplain owners can make an informed choice on whether to: try to build shore protection, relocate structures farther away from the bluff, or sell the property
- Potential shoreline or floodplain owners can make an informed choice as to whether to: buy property facing the uncertainties and risks associated with natural fluctuations in lake levels.
- Designers and sellers of shoreline protection products and services will be interested in using the information to best craft their products and services.
Potential Uses of the Planning Time Horizons
In order to evaluate the implications of continuing to use a 50-year time horizon for potential damage estimates, it is important to consider the host of time frames inherent in other aspects of such an analysis. It is also important to consider the time frames of interest to various users. Time frames are used to:
- Project potential variation in the lake levels using a geologic time frame: 10,000 years
- Project lake level variation based on existing data: 150 years
- Establish the engineering design life of large-scale water resources projects: 50 years
- Project land use change along the shoreline and in floodplains: 10 - 30 years
- Predict property owner responses to varying high or low lake levels: 1 - 10 years
Whatever time frame is selected for the potential damage estimates, it should be sensitive to the above parameters. That will likely require greater detail in cost estimates for the early years of the damage calculation, yet the period must also be long enough to consider land use change and likely property owner response over time. At the same time, the period should not be so long that it has no relationship to practical considerations inherent in property ownership/management and long term use of the land. These practical considerations include the period for which detailed data has been available, the average life of structures, typical mortgage lengths and the declining confidence (increasing risk) associated with projections more than five years in the future.
Implications of Using a 50-year Planning Horizon
Previously, a 50-year time horizon has been used for calculating potential damages from prolonged high or low lake levels. This period appears to have been arbitrarily selected. It conforms to standard Army Corps of Engineers protocol that calls for the use of 50- and 100-year time frames for cost/benefit studies. However, past studies have sometimes been severely criticized for using such long time frames. One advantage of a long time frame is that small economic benefits compounded over many years add up to large benefits. Conversely, even small economic costs can become huge when compounded over a 50-year period (especially if a discount rate is used as described below). Depending on the outcome of the analysis, this can result in arguing strongly for the option with big positive future benefits. There are two big problems with such an approach. First, the level of confidence that can be placed in economic projections often begins to fall off rapidly after five years. Second, as a practical matter, it is difficult to get investors (existing or potential property owners) or politicians to take an action with a big long-term benefit and a high initial cost (fiscally or politically).
The discount rate used to calculate the time value of money is also important because of its sensitivity to the time frame. In order to equate a future time with the present, projections of future costs or benefits are often expressed in terms of net present value. A discount rate is used to convert future dollars into equivalent net present dollars. There is an inherent bias in the use of long time frames with discount rates. The longer the time frame, the greater the net present benefit because of the longer period over which to amortize costs and the effect of the discount rate on present value over the long period. This results in a bias toward expensive projects where the resources are available to construct them in the first place. The shorter the time frame of the projected costs, the less the bias inherent in the use of a discount rate to calculate net present value.
On the other hand, many common natural resources have a value that far transcends the near future, if they are managed for the benefit of present and future generations. Few natural resources exceed the value of the Great Lakes in this regard. Decisions to protect this resource, the land that surrounds it, and the population that depends upon it must be made within time frames whose vision registers in the thousands of years in the future.
In this context, the use of a 50-year planning horizon is short for a resource like Lake Michigan and is within the sphere of existing projection capabilities, but it is outside typical confidence levels--especially when discount rates are applied for that long. A 50-year period also does not fit neatly with practical considerations inherent in property ownership/management. Other time frames, especially those that project costs at various time intervals, rather than for every year on a time continuum may offer more practical utility, a higher confidence level in the early years and still preserve a long term view.
Other Planning Horizon Options
An examination of other time frames used when examining Lake Michigan and similar resources reveals a range from 5 to 500 years. For example:
- Shoreline landowners often look to amortize their investment in property or improvements (including shore protection, floodproofing or relocation on the site to avoid hazards) in terms of their anticipated ownership period. This is often 5-20 years, but could be shorter or longer for some owners.
- FEMA commonly uses 10-, 50-, 100-, and 500-year time horizons for floodplain and storm event calculations.
- The Michigan Department of Environmental Quality uses 30- and 60-year periods for calculation of minimum setbacks for properties in designated high-risk erosion areas.
- As of 1990, three other states use a 30-year period to establish erosion setbacks, one state uses a 30-40 year period, and two states use a 50-year period.
- As mentioned earlier, time periods used for land use projections in local master plans tend to be 20-30 years.
It appears there is a wide variability across the nation in the time periods used to deal with coastal erosion and floodplains. Listed below are a range of time period options based on the above information. Except for the last two options, which are fixed-point time frames, all the others are ranges:
- Very short time frame (1-5 years)
- Short time frame (5-15 years)
- Medium time frame (15 - 30 years)
- Long time frame (30 - 60 years)
- Very long time frame (over 60 years)
- One fixed time frame (50 years)
- Combination of fixed points in time.
Implications of Using other Planning Horizon Options
Based From the perspective of different users of potential damage estimates, some time frames have greater utility than others do. Yet to accommodate the needs of most users and uses of potential damage estimates, a range of time periods, or several points in time across the entire time continuum are needed. For example, the results could be listed in a variety of ranges. One option is the five ranges listed above: 1-5 years, 5-15 years, 15-30 years, 30- 60 years and more than 60 years. A simpler approach is to use three ranges: near term damages (1 - 5 years), mid-length damages (20 - 30 years), and long term damages (50 - 60 years). Or, alternatively, the results could be listed for a particular year, such as year 5, year 25, or year 50.
Three or five sets of estimates is small enough to easily communicate the results of two to five lake level scenarios. However, the annual damage estimates for all years in a continuum of at least 1-60 years for each scenario will need to be available to meet the needs of the widest range of users. Some users will want to aggregate the results for different ranges than can be accommodated in a short, medium and long range.
Recommendations
It is recommended that a time frame be selected that meets most users needs. This is either a short term (1-5 years), medium term (20 - 30 years) or long term, or as a fixed point on this interval (5, 25 and 50 years) as described in the paragraph above. However, two caveats are important. First, the projections need to be presented with a clear indication of the declining confidence level the farther the estimates are projected into the future. Second, if the information is presented in a cost/benefit context, there needs to be a clear indication of the discount rate used and the bias effect it has the longer the term of the projections. If these cautions arent heeded, the projections could be easily misinterpreted and would be easy to use in a misleading way.
This recommendation does present challenges for structuring the damage estimate calculations and for displaying the results in an easy-to-read and understand fashion. However, the reward for doing so is broader utility of the results to a wider set of stakeholders with less confusion than in the past.
Based on the above information, the LMPDS Study Team will be using a 50-year planning horizon for the evaluations that are being carried out.
Suggestions for Further Study
None of the likely responses of stakeholders presented in this analysis is the result of survey information or a literature review of prior research. As a result, intelligent, informed persons could disagree on presumed responses. Only additional research could validate the conjectured responses. However, if the premises underlying the presumed responses in Table 1 are widely accepted, then whether all the responses indicated are completely accurate is irrelevant, since the purpose is to demonstrate that different users of the damage estimates have different uses for the information and that different time frames are associated with those uses. The benefit of additional research would be in the area of specific intervals to use for presenting the results. Presenting the potential damage estimates to different stakeholders and measuring their responses can easily test various intervals.
Another area for debate and future research is how many (and what combination of factors of) sustained low or high lake level scenarios must potential damage estimates be prepared for (with the time frames agreed upon), in order to meet the wide variety of needs of the many different stakeholders. The most valuable information for particular users may not be damage estimates for one or two situations at particular points in time, but rather a range of costs for a range of lake level situations over time. If each scenario were associated with probability information, it would be easiest to assess (from different perspectives) which was of most concern. If this was refined further to reflect potential damage estimates under each of the situations listed in the first column of Table 1, then the results would have the greatest utility for all users. It would lead to better informed decision making after considering a range of possible responses to sustained high or low lake levels. Better public policy and better individual property owner decisions should be the result.
Download the Full Planning and Zoning Center Consulting Report on this topic from The LMPDS Document Clearinghouse.
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