Making Sense of the Bottom Line: A Guide to Reading Cost-Benefit Reports
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  • 1. Making Sense of the Bottom Line:A Guide to Reading Cost-Benefit ReportsApril 24, 2012Gary VanLandingham, Director, Results First, Pew Center on the StatesJoshua Rinaldi, Policy Analyst, Cost-Benefit Analysis Unit, Vera Institute of Justice Slide 1
  • 2. This webinar will teach you to: • Use a structured framework to read cost-benefit reports. • Quickly identify the key components of a cost- benefit analysis that affect the bottom line. • Understand how these details and the CBA are relevant to policy discussions and decisions. Slide 2 • April 25, 2012
  • 3. Why is cost-benefit analysis important?• Resources are scarce and getting scarcer.• People want to know how to use resources more efficiently to get the most “bang for the buck.”• Cost-benefit analysis (CBA) provides information to help weigh the pros and cons of investments. Slide 3 • April 25, 2012
  • 4. Making Sense of the Bottom Line Gary VanLandingham Joshua Rinaldi Director Policy Analyst Results First Vera Institute of Justice Slide 4 • April 25, 2012
  • 5. Results FirstResults First is partnering with states to assess andadvance policy options that benefit residents andimprove states’ fiscal health. Results First is an initiativeof the Pew Center on the States and the John D. andCatherine T. MacArthur Foundation, with additionalsupport from the Annie E. Casey Foundation. Slide 5 • April 25, 2012
  • 6. The Cost-Benefit Knowledge Bank for Criminal Justice (CBKB)is a project of the Vera Institute of Justice funded by theU.S. Department of Justice’s Bureau of Justice Assistance. • Website (cbkb.org) • Cost-benefit analysis toolkit • Snapshots of CBA literature • Podcasts, videocasts, and webinars • Roundtable discussions • Community of practice Slide 6
  • 7. Agenda• CBA basics 5 minutes• A guide to reading CBA reports 30 minutes• Recap 5 minutes• Questions and answers 15 minutes Slide 7 • April 25, 2012
  • 8. Housekeeping items• If you need Webinar support or for troubleshooting:  Type questions into the chat box  Call 800-843-9166  Send e-mail to help@readytalk.com• This webinar is being recorded.• The recording and PowerPoint slides will be posted on cbkb.org. Slide 8 • April 25, 2012
  • 9. Housekeeping items Questions  Use the chat feature to send us your questions at any time during the webinar.  We will address your questions midway through the presentation and again at the end. Slide 9 • April 25, 2012
  • 10. CBA Basics Slide 10 • April 25, 2012
  • 11. What is cost-benefit analysis?A type of economic analysis thatcompares the costs and benefits ofpolicies and programs, and • Identifies efficient uses of resources • Uses dollars as a common measurement • Presents a long-term picture Slide 11 • April 25, 2012
  • 12. The CBA process1. Determine the impact of the initiative.2. Determine which perspectives to include.3. Measure costs and benefits (in dollars).4. Compare costs and benefits.5. Assess the reliability of the results.For a glossary of CBA terms:cbkb.org/basics/glossary Slide 12 • April 25, 2012
  • 13. A Guide to ReadingCost-Benefit Reports Slide 13 • April 25, 2012
  • 14. A guide to reading cost-benefit reports 1. Getting your bearings 2. Surveying the landscape 3. Looking at the details 4. Making sense of your surroundings Slide 14 • April 25, 2012
  • 15. Cost-benefit analysis of CEO• The Center for Employment Opportunities (CEO) is a New York City–based employment program for formerly incarcerated people.• We will refer to examples from a cost-benefit analysis of CEO to illustrate how this guide takes you through a CBA report. Slide 15 • April 25, 2012
  • 16. Step 1Getting Your Bearings Slide 16 • April 25, 2012
  • 17. Getting your bearings• What’s the bottom line?• What does the report cover? Slide 17 • April 25, 2012
  • 18. What’s the bottom line?• Look at the executive summary for the “bottom line” comparison of costs and benefits, expressed as: • Net Present Value (NPV) or Net Benefits total benefits – total costs • Benefit-Cost Ratio (BCR) total benefits/total costs • Return on Investment (ROI) total benefits/(total benefits – total costs)• For more information: cbkb.org/toolkit/reporting-cost-benefit-results Slide 18 • April 25, 2012
  • 19. What’s the bottom line?• Look at the executive summary for the NPV, net benefits, BCR, or ROI.ES, page 18ES, page 19 Slide 19 • April 25, 2012
  • 20. What does the report cover?The executive summary may discuss:• Measurements and components of the costs and benefits• Assumptions on which costs and benefits are based• Omissions from the study Slide 20 • April 25, 2012
  • 21. What does the report cover? • Table of contents • Section headings • Tables • Appendices Slide 21 • April 25, 2012Page vii
  • 22. Step 2Surveying the Landscape Slide 22 • April 25, 2012
  • 23. Surveying the landscape• What data did the CBA use?• Which perspectives were included?• What is the breakdown of costs and benefits? Slide 23 • April 25, 2012
  • 24. What data did the CBA use?Identify:• How recent the data is• How specific the data is to the jurisdiction• How costs and benefits were measured Slide 24 • April 25, 2012
  • 25. Data for the CEO cost-benefit analysisEvaluation • Three-year random-assignment studyBudgets • CEO financial statements • New York City budget documents • New York State budget documentsInterviews • CEO staffLiterature • Research literature on victimization costsThe data section is on page 56 of the CEO report. Slide 25 • April 25, 2012
  • 26. Which perspectives were included?• CBAs examine several perspectives to present a comprehensive picture of a program’s net impact to society.• In criminal justice, CBAs often consider the perspectives of:  Taxpayers  Victims  Program participants Slide 26 • April 25, 2012
  • 27. Perspectives in the CEO analysisPage 67 Slide 27 • April 25, 2012
  • 28. What is the breakdown of costs and benefits?• Understanding which perspectives are included and what data was used will help you identify the benefits included in the analysis. Page 67 Slide 28 • April 25, 2012
  • 29. Questions Use the chat feature to send us your questions. Slide 29 • April 25, 2012
  • 30. Step 3Looking at the Details Slide 30 • April 25, 2012
  • 31. Looking at the details• Does the report use marginal costs?• What time period was analyzed?• What discount rate was used?• Which impacts were not monetized? Slide 31 • April 25, 2012
  • 32. Does the report use marginal costs? • Marginal costs (and benefits) are incurred because of changes in units of activity from an existing level of operations. Cost per day of keeping one inmate in prison in New York in 2011 Average cost Marginal cost $164.59* $27.53** * Source: Vera’s “The Price of Prisons” report (2012) ** Source: CEO report (2012) • For more information: cbkb.org/toolkit/marginal-costs Slide 32 • April 25, 2012
  • 33. What time period was analyzed?• Identify the period used in the report to collect or estimate costs and benefits.• Costs and benefits should be measured for as long as they last. Page 6 Slide 33 • April 25, 2012
  • 34. What discount rate was used?• Discounting is a technique that translates future costs and benefits into present-day values.• Criminal justice CBAs usually use rates of 3% or 5%.• The CEO report used a 3% discount rate. Slide 34 • April 25, 2012
  • 35. Why is discounting important?• A higher discount rate (relative to a lower discount rate) will more greatly reduce future benefits or costs in present-value terms.• The discount rate selected is of particular importance in CBAs with long time frames where a large share of the costs and benefits accrue in future years.• For more information: cbkb.org/toolkit/discounting Slide 35 • April 25, 2012
  • 36. Which impacts were not monetized?• If a CBA does not monetize certain impacts, it may discuss them qualitatively.Page 57 Slide 36 • April 25, 2012
  • 37. Step 4Making Senseof Your Surroundings Slide 37 • April 25, 2012
  • 38. Making sense of your surroundings • How does the study address uncertainty? • What are the study’s limitations? • How does this all add up? Slide 38 • April 25, 2012
  • 39. How does the study address uncertainty?• CBAs rely on estimates and assumptions.• Uncertainty in estimates or assumptions means uncertainty in the results. Slide 39 • April 25, 2012
  • 40. How does the study address uncertainty?• Sensitivity analysis provides information about the degree to which results will change if the CBA’s underlying assumptions are modified.• Sensitivity analysis can be used to present a range of results. Slide 40 • April 25, 2012
  • 41. Uncertainty in the CEO analysis• In a sensitivity analysis, the CEO results were tested by replacing the benefits calculated with the “worst- case” values.• The CBA was performed again using these worst-case values to determine whether it still resulted in a positive bottom line. Slide 41 • April 25, 2012
  • 42. Uncertainty in the CEO analysisPage 122 Slide 42 • April 25, 2012
  • 43. What are the study’s limitations?The report should describe any limitations ofthe analysis.Page 56Page 57 Slide 43 • April 25, 2012
  • 44. How does all this add up?• Limitations are a part of any analysis and do not invalidate a CBA. But it is important that the limitations are clear.• Uncertainty is a part of any analysis. Still, it is important that the range of possible cost-benefit results is clear, so that policymakers can make well-informed decisions.• Benefits are not necessarily budget savings. Slide 44 • April 25, 2012
  • 45. Recap Slide 45 • April 25, 2012
  • 46. Putting it all together• Don’t panic. There is a logical approach to reading cost-benefit reports.• Use this guide to determine whether the CBA you’re reading is based on sound data and assumptions.• Use the guide to ask questions to better understand the CBA results. Slide 46 • April 25, 2012
  • 47. A guide to reading cost-benefit reports 1. Getting your bearings 2. Surveying the landscape 3. Looking at the details 4. Making sense of your surroundings Slide 47 • April 25, 2012
  • 48. 1. Getting your bearings• What’s the bottom line?• What does the report cover? Slide 48 • April 25, 2012
  • 49. 2. Surveying the landscape• What data did the CBA use?• Which perspectives were included?• What is the breakdown of costs and benefits? Slide 49 • April 25, 2012
  • 50. 3. Looking at the details• Does the report use marginal costs?• What time period was analyzed?• What discount rate was used?• Which impacts were not monetized? Slide 50 • April 25, 2012
  • 51. 4. Making sense of your surroundings• How does the study address uncertainty?• What are the study’s limitations?• How does this all add up? Slide 51 • April 25, 2012
  • 52. Questions Use the chat feature to send us your questions. Slide 52 • April 25, 2012
  • 53. Contact information Gary VanLandingham gvanlandingham@pewtrusts.org Joshua Rinaldi jrinaldi@vera.org 212-376-5201 Slide 53 • April 25, 2012
  • 54. SourcesMDRC. (2012). More Than a Job: Final Results from the Evaluation of the Center for Employment Opportunities (CEO) Transitional Jobs ProgramVera Institute of Justice. (2012). The Price of Prisons: What Incarceration Costs Taxpayers Slide 54 • April 25, 2012
  • 55. This project is supported by Grant No. 2009-MU-BX K029awarded by the Bureau of Justice Assistance. The Bureau ofJustice Assistance is a component of the Office of JusticePrograms, which also includes the Bureau of Justice Statistics,the National Institute of Justice, the Office of Juvenile Justiceand Delinquency Prevention, and the Office of Sex OffenderSentencing, Monitoring, Apprehending, Registering, andTracking. Points of view or opinions in this document are thoseof the author and do not represent the official position orpolicies of the United States Department of Justice. Slide 55
  • 56. Thank you! Slide 56 • April 25, 2012