Estimating Marginal Costs forCost-Benefit Analysis in Criminal JusticeFebruary 23, 2011Christian Henrichson, Senior Policy...
Estimating Marginal Costs forCost-Benefit Analysis in Criminal Justice Christian Henrichson        Valerie Levshin        ...
The Cost-Benefit Knowledge Bank for Criminal Justice (CBKB) is aproject of the Vera Institute of Justice funded by the U.S...
Today’s AgendaIntroduction and Housekeeping          5 minutesOverview of Cost-Benefit Analysis     10 minutesUnderstandin...
Housekeeping items          Questions             Use the chat feature to send us your              questions at any time...
Housekeeping itemsWebinar support and troubleshooting    Call: (800) 843-9166    Email: help@readytalk.comHandoutsThis w...
Preview of today’s webinarYou will learn:  • The difference between marginal and average    costs.  • An approach to readi...
Overview ofCost-Benefit Analysis inJustice Policy                Slide 8
What is Cost-Benefit Analysis (CBA)?• A tool to assess the pros and  cons of policies and programs• A method for finding o...
Added Value of CBA• Monetizes costs and benefits• Assesses the economic impact over the long term  horizon   • Future cost...
The CBA Process  • Determine the Impact of the initiative  • Determine whose perspectives matter  • Measure costs and bene...
Measuring Costs and Benefits•   Measure costs    • quantity × unit cost    • e.g.: number of program participants × cost p...
Measuring Costs and Benefits•   Measure costs    • quantity × unit cost    • e.g.: number of program participants × cost p...
Marginal Costs and Policy Decisions―There is certain to be some budgetary benefit. It costs $44,563  (the average for the ...
Marginal Costs and Policy Decisions―At present, it costs an average of $46,000 per year to house an  inmate in the MA DOC ...
Questions            Slide 16
UnderstandingMarginal Costs            Slide 17
Marginal Costs and CBA• Programs and policies can create costs or cost-  savings (benefits) to government agencies   • Exa...
Marginal versus Average Costs• Marginal costs describe how the cost of an operation  changes when workload changes by a sm...
Marginal versus Average Costs• Example:   • 1,000-bed prison   • Inmate population goes from 900 to 850   • Prison system ...
Marginal versus Average Costs  When policies have a small effect on agency   operations, using average costs, instead of  ...
Step-Fixed Costs• But what if the inmate population decreases from 900  to 700?• Then add step-fixed costs to marginal cos...
Marginal Costs                      Inmates                      Guards                     WardenHousing                 ...
Long-Term Marginal Costs                      Inmates                      Guards                     WardenHousing       ...
Average Costs                    Inmates                       Guards                    WardenHousing                    ...
Which Costs to Use in CBA?• Magnitude of the costs depends on the policy’s impact  on the system    Small reduction in th...
Questions            Slide 27
Estimating Marginal Costs            Slide 28
Several Approaches1) Ask government agencies2) Review budget and workload documents3) Consider capacity reductions4) Use e...
1. Ask Government Agencies• How: contact local/state budget  offices and fiscal departments  of criminal justice agencies ...
1. Ask Government Agencies                Example: a spreadsheet showing marginal cost by levels of                 chang...
2. Review budget and workload documents• How: review budget documents to  identify marginal costs.• Example:              ...
2. Review budget and workload documents            • Pro: budget documents are usually readily available                  ...
3. Consider Capacity Reductions• How: review budget documents  and consult with criminal justice  agencies to determine wh...
3. Consider Capacity Reductions• Pro: reflects actual savings from past experience.• Con: previous capacity reductions may...
4. Use Estimates From Other States orOrganizations• How :   • review reports and studies                           for    ...
4. Use Estimates From Other States orOrganizations• Example 1: unit cost estimates from a WSIPP report:  Please see Handou...
4. Use Estimates From Other States orOrganizations• Example 2: Calculating North Carolina marginal cost  of law enforcemen...
4. Use Estimates From Other States orOrganizations• Pro: information is generally available.• Con: estimates may not accur...
5. Conduct Regression Analysis• How: conduct regression  analysis using historical  spending and population data.• What is...
5. Conduct Regression Analysis• Example:   Washington State Institute for Public Policy (WSIPP)   uses police expenditures...
Recap of Estimation Approaches1) Ask government agencies2) Review budget and workload documents3) Consider capacity reduct...
Key Takeaways• Marginal costs represent a more accurate measure of  costs and cost-savings associated with new programs  a...
Questions            Slide 44
Wrap-Up          Slide 45
Recap of Today’s WebinarYou learned:   • The difference between marginal and average     costs.   • Why marginal cost are ...
Follow-upPlease complete the evaluation form as you leave this training.To receive information and notifications about upc...
This project is supported by Grant No. 2009-MU-BX K029 awarded by the Bureau ofJustice Assistance. The Bureau of Justice A...
Contact InformationChristian Henrichsonchenrichson@vera.org(212) 376-3161Valerie Levshinvlevshin@vera.org(212) 376-3062cbk...
Thank you!             Slide 50
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Estimating marginal costs webinar

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  • Say that many people estimate average costs.
  • also it is a term borrowed from economists
  • Example correctional officers. supervisor for every 10 staff.
  • Say that even with prison closures, there are still some fixed costs that don’t get eliminated like the cost of running the central docs office.
  • Or, they could have closed an operations that are extremely wasteful – low-hanging fruit – and there may not be other very wasteful ops to close.
  • “may change for other reasons” – police costs increase because of technological investments or political will, not increasing crime rates or arrests.
  • When going through this slide, we (I) have to remember to talk about the progression of these methods; e.g. – the first one is easiest if you have relationships with government agencies; the second and third ones are also relatively easy, but requires some understanding of budget documents; the fourth one just requires some time to go through studies and reports from other states/organizations; the fourth one requires expertise in statistics/regression analysis.We could try to stuff this into a slide, but the info might be too nuanced to fit into bullet points.
  • Estimating marginal costs webinar

    1. 1. Estimating Marginal Costs forCost-Benefit Analysis in Criminal JusticeFebruary 23, 2011Christian Henrichson, Senior Policy Analyst, Cost-Benefit Analysis UnitValerie Levshin, Policy Analyst, Cost-Benefit Analysis Unit Slide 1
    2. 2. Estimating Marginal Costs forCost-Benefit Analysis in Criminal Justice Christian Henrichson Valerie Levshin Slide 2
    3. 3. The Cost-Benefit Knowledge Bank for Criminal Justice (CBKB) is aproject of the Vera Institute of Justice funded by the U.S.Department of Justice’s Bureau of Justice Assistance. • Website (cbkb.org) • CBA Toolkit • Snapshots of CBA Literature • Podcasts, Videocasts, and Webinars • Roundtable Discussions • Community of Practice Slide 3
    4. 4. Today’s AgendaIntroduction and Housekeeping 5 minutesOverview of Cost-Benefit Analysis 10 minutesUnderstanding Marginal Costs 15 minutesEstimating Marginal Costs 25 minutesWrap Up 5 minutes Slide 4
    5. 5. Housekeeping items Questions  Use the chat feature to send us your questions at any time during the webinar.  We will address your questions after each section of the presentation. Slide 5
    6. 6. Housekeeping itemsWebinar support and troubleshooting  Call: (800) 843-9166  Email: help@readytalk.comHandoutsThis webinar is being recordedThe recording and all materials will be posted to cbkb.org Slide 6
    7. 7. Preview of today’s webinarYou will learn: • The difference between marginal and average costs. • An approach to reading CBA reports. • Questions to ask while reading CBA reports. Slide 7
    8. 8. Overview ofCost-Benefit Analysis inJustice Policy Slide 8
    9. 9. What is Cost-Benefit Analysis (CBA)?• A tool to assess the pros and cons of policies and programs• A method for finding out what will achieve the greatest net benefit to society• An approach to policymaking Slide 9
    10. 10. Added Value of CBA• Monetizes costs and benefits• Assesses the economic impact over the long term horizon • Future costs and benefits are discounted to the present• Includes both tangible and intangible costs/benefits Slide 10
    11. 11. The CBA Process • Determine the Impact of the initiative • Determine whose perspectives matter • Measure costs and benefits (outcomes) • Compare costs and benefits • Test results Slide 11
    12. 12. Measuring Costs and Benefits• Measure costs • quantity × unit cost • e.g.: number of program participants × cost per participant• Measure benefits (in dollars) • quantity × unit cost • e.g.: number of people who will be incarcerated × cost of incarcerating one person Slide 12
    13. 13. Measuring Costs and Benefits• Measure costs • quantity × unit cost • e.g.: number of program participants × cost per participant• Measure benefits (in dollars) • quantity × unit cost • e.g.: number of people who will be incarceration × cost of incarcerating one person The accuracy of the unit costs affects the accuracy of the cost benefit results. Slide 13
    14. 14. Marginal Costs and Policy Decisions―There is certain to be some budgetary benefit. It costs $44,563 (the average for the U.S. is $28,817) to incarcerate a prisoner for a year in California — nearly the same price as a year at Harvard University with room and board.‖The Fiscal Times, Runaway Prison Costs Trash State Budgets, Adam Skolnick, Feb. 9, 2011.• True: The average cost of incarceration and the average cost of Harvard are about the same.• False: The savings that would be generated if the prison population declined by one inmate would be sufficient to send one person to Harvard. Slide 14
    15. 15. Marginal Costs and Policy Decisions―At present, it costs an average of $46,000 per year to house an inmate in the MA DOC [Massachusetts Department of Corrections]. But there is more to this figure than one might realize. This cost changes with the inmate’s security level, medical needs and other factors. What is less known is that, on average, the cost associated with one inmate’s specific needs is about $9K per year – this covers stuff like food, clothing, and other incidentals that we pay for on an inmate-by-inmate basis.‖Taunton Daily Gazette, Addressing the prison’s budget and population. Paul Heroux, Feb. 17, 2011 Slide 15
    16. 16. Questions Slide 16
    17. 17. UnderstandingMarginal Costs Slide 17
    18. 18. Marginal Costs and CBA• Programs and policies can create costs or cost- savings (benefits) to government agencies • Example: a corrections department decides to expand a reentry program that decreases recidivism rates. How much will it cost to serve more people in the program? How much will the program save by reducing recidivism rates and, therefore, prison costs?• To accurately measure the costs or savings from initiatives, determine the marginal costs of government operations. Slide 18
    19. 19. Marginal versus Average Costs• Marginal costs describe how the cost of an operation changes when workload changes by a small amount. • Synonymous with incremental • Borrowed from economics• Average costs include both marginal and fixed costs.• Fixed costs do not change as workload changes. Slide 19
    20. 20. Marginal versus Average Costs• Example: • 1,000-bed prison • Inmate population goes from 900 to 850 • Prison system saves on food, clothing (marginal costs) • Does not save on electricity, building maintenance, warden salary (fixed costs)• The average cost may be $46,000, but this cost includes both the marginal and the fixed cost• This small reduction in the inmate population will not save $46,000 Slide 20
    21. 21. Marginal versus Average Costs When policies have a small effect on agency operations, using average costs, instead of marginal costs, will overstate costs/savings. Slide 21
    22. 22. Step-Fixed Costs• But what if the inmate population decreases from 900 to 700?• Then add step-fixed costs to marginal costs to determine the long-term marginal costs.• Step-fixed costs describe how the cost of an operation changes with significant changes in activity. Cost Quantity Slide 22
    23. 23. Marginal Costs Inmates Guards WardenHousing If the inmateArea 1 population decreases by 5 people, the prison system can save onHousing food and clothingArea 2 (marginal costs).HousingArea 3 Marginal cost: $5,000 Note: only 3 housing areas are depicted, most prisons have many more. Slide 23
    24. 24. Long-Term Marginal Costs Inmates Guards WardenHousing If the inmateArea 1 population decreases by 20 people, the prison system can save onHousing food, clothingArea 2 (marginal costs) and staff salaries (step- fixed costs)HousingArea 3 Long-term marginal cost: $20,000 Note: only 3 housing areas are depicted, most prisons have many more. Slide 24
    25. 25. Average Costs Inmates Guards WardenHousing If the inmateArea 1 population decreases by 600 people, the prison can be closed,Housing eliminating all prisonArea 2 expenses. Average cost: $60,000*HousingArea 3 This cost still excludes some fixed costs like the cost of the central Note: only 3 housing areas are depicted, most prisons have corrections office. many more. Slide 25
    26. 26. Which Costs to Use in CBA?• Magnitude of the costs depends on the policy’s impact on the system  Small reduction in the inmate population?  Prison wings closed? A whole prison closed?  New reentry program?• Based on the impact, use marginal, long-term marginal, or average costs Slide 26
    27. 27. Questions Slide 27
    28. 28. Estimating Marginal Costs Slide 28
    29. 29. Several Approaches1) Ask government agencies2) Review budget and workload documents3) Consider capacity reductions4) Use estimates from other organizations or states5) Conduct regression analysis Slide 29
    30. 30. 1. Ask Government Agencies• How: contact local/state budget offices and fiscal departments of criminal justice agencies • Agency fiscal offices • Executive budget offices • Legislative fiscal staff Ask agencies: • Do you have marginal or incremental costs? • How would a change in inmate population (or probation workload, etc.) affect agency funding? Slide 30
    31. 31. 1. Ask Government Agencies  Example: a spreadsheet showing marginal cost by levels of change in the inmate population at a hypothetical jail. Type of Cost 1-100 101-600 600+ inmates inmates inmates Corrections personnel n/a $16,700 $52,145 Other personnel n/a $5,575 $15,300 Supplies and materials $1,300 $1,550 $1,550 Total Marginal Cost $1,300 $20,000 $72,000 • Pro: estimates likely reflect actual spending patterns. • Con: agencies may not have marginal cost estimates.See Handout for additional detail:Jail Marginal Cost per Inmate per Year Slide 31
    32. 32. 2. Review budget and workload documents• How: review budget documents to identify marginal costs.• Example: Marginal Cost of a Prison Item Estimate Source/Calculation Inmates per staff 2.5 Budget documents Staffing ratio (staff per inmates) 0.4 1 / 2.5 Annual Salary $29,000 Sunshinereview.org Personnel cost per inmate $11,600 $29,000 x 0.4 Supplies & materials per inmate $7,000 Estimate Marginal Cost $18,600 $11,600 + $7,000 Slide 32
    33. 33. 2. Review budget and workload documents • Pro: budget documents are usually readily available • Salaries aren’t secrets! • Con: can be difficult to determine what is a variable and what is a fixed cost; estimates may not reflect actual spending decisions Salary Data in North Carolina from sunshinereview.orgPlease see Handout #2 Government Employee Salaries:A Sample Page from Sunshinereview.org Slide 33
    34. 34. 3. Consider Capacity Reductions• How: review budget documents and consult with criminal justice agencies to determine whether there has been a recent capacity reduction.• Example: From the New York State Budget: “The parolee population is projected to decline by nearly 1,500; therefore, fewer parole officers are needed. …Savings are estimated at $3.7 million.‖ (New York State Budget Presentations 2010) Marginal cost = $3.7 million / 1,500 = $2,466 per parolee Slide 34
    35. 35. 3. Consider Capacity Reductions• Pro: reflects actual savings from past experience.• Con: previous capacity reductions may represent unique situations that may not occur in the future, so marginal cost estimates may not hold in the future. e.g., if a previous capacity reduction involved a closure of a outdated facility that was expensive to maintain, these savings might not be indicative of savings in newer prisons. Slide 35
    36. 36. 4. Use Estimates From Other States orOrganizations• How : • review reports and studies for marginal cost estimates • adjust these estimates for cost-of-living differences across states and inflation, if applicable. • [or] determine the marginal/average cost ratio in another state, then apply the ratio to determine the marginal cost in your state. Slide 36
    37. 37. 4. Use Estimates From Other States orOrganizations• Example 1: unit cost estimates from a WSIPP report: Please see Handout #3, Marginal Operating Costs, Washington State Criminal Justice System Slide 37
    38. 38. 4. Use Estimates From Other States orOrganizations• Example 2: Calculating North Carolina marginal cost of law enforcement using data from WSIPP and the Bureau of Justice Statistics (BJS).Marginal Cost in WA Estimate SourceAverage Cost - WA $4,182 WSIPP reportMarginal Cost - WA $670 WSIPP reportMarginal/Average cost 16% $670 / $4,182Average Cost - NC $3,110 police expenditures / arrests $1,358,211,000 / 436,676 BJSMarginal Cost in NC $498 $3,110 x 16% Slide 38
    39. 39. 4. Use Estimates From Other States orOrganizations• Pro: information is generally available.• Con: estimates may not accurately reflect local costs. Slide 39
    40. 40. 5. Conduct Regression Analysis• How: conduct regression analysis using historical spending and population data.• What is regression analysis? • Technique used to understand how changes in one or more variables (or factors), affect changes in a variable of interest. Slide 40
    41. 41. 5. Conduct Regression Analysis• Example: Washington State Institute for Public Policy (WSIPP) uses police expenditures and arrest data to estimate the marginal cost of policing.• Pro: reflects changes in actual spending vs. workload.• Con: spending may change for other reasons; long- term data on costs and workloads may not be available. Slide 41
    42. 42. Recap of Estimation Approaches1) Ask government agencies2) Review budget and workload documents3) Consider capacity reductions4) Use estimates from other organizations or states5) Conduct regression analysis Slide 42
    43. 43. Key Takeaways• Marginal costs represent a more accurate measure of costs and cost-savings associated with new programs and policies• There are several ways to estimate marginal costs. Pick one that is right for you.• Work with government staff to develop marginal cost estimates and build relationships. Slide 43
    44. 44. Questions Slide 44
    45. 45. Wrap-Up Slide 45
    46. 46. Recap of Today’s WebinarYou learned: • The difference between marginal and average costs. • Why marginal cost are necessary in a credible cost-benefit analysis. • 5 methods to estimate the marginal costs at criminal justice agencies. Slide 46
    47. 47. Follow-upPlease complete the evaluation form as you leave this training.To receive information and notifications about upcoming webinars and other events • Visit the Cost-Benefit Knowledge Bank for Criminal Justice at http://cbkb.org • Subscribe to receive updates from CBKB. • Follow us on Twitter at http://www.twitter.com/CBKBankThe next webinar will be on March 24th. Elizabeth Drake from the Washington State Institute of Public Policy (WSIPP) will discuss the role of evaluation in CBA. Slide 47
    48. 48. This project is supported by Grant No. 2009-MU-BX K029 awarded by the Bureau ofJustice Assistance. The Bureau of Justice Assistance is a component of the Office ofJustice Programs, which also includes the Bureau of Justice Statistics, the NationalInstitute of Justice, the Office of Juvenile Justice and Delinquency Prevention, andthe Office of Sex Offender Sentencing, Monitoring, Apprehending, Registering, andTracking. Points of view or opinions in this document are those of the author and donot represent the official position or policies of the United States Department ofJustice. Slide 48
    49. 49. Contact InformationChristian Henrichsonchenrichson@vera.org(212) 376-3161Valerie Levshinvlevshin@vera.org(212) 376-3062cbkb@cbkb.orghttp://www.cbkb.org Slide 49
    50. 50. Thank you! Slide 50

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