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Making Sense of the Bottom Line:
A Guide to Reading Cost-Benefit Reports




April 24, 2012
Gary VanLandingham, Director, Results First, Pew Center on the States
Joshua Rinaldi, Policy Analyst, Cost-Benefit Analysis Unit, Vera Institute of Justice



                                                                                        Slide 1
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
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
Making Sense of the Bottom Line

  Gary VanLandingham                  Joshua Rinaldi
        Director                       Policy Analyst
      Results First                Vera Institute of Justice




               Slide 4 • April 25, 2012
Results First

Results First is partnering with states to assess and
advance policy options that benefit residents and
improve states’ fiscal health. Results First is an initiative
of the Pew Center on the States and the John D. and
Catherine T. MacArthur Foundation, with additional
support from the Annie E. Casey Foundation.




                      Slide 5 • April 25, 2012
The Cost-Benefit Knowledge Bank for Criminal Justice (CBKB)
is a project of the Vera Institute of Justice funded by the
U.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
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
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
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
CBA Basics




      Slide 10 • April 25, 2012
What is cost-benefit analysis?

A type of economic analysis that
compares the costs and benefits of
policies and programs, and

 •   Identifies efficient uses
     of resources
 •   Uses dollars as a common
     measurement
 •   Presents a long-term picture




                         Slide 11 • April 25, 2012
The CBA process

1. 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
A Guide to Reading
Cost-Benefit Reports




       Slide 13 • April 25, 2012
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
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
Step 1
Getting Your Bearings




       Slide 16 • April 25, 2012
Getting your bearings

• What’s the bottom line?
• What does the report cover?




                 Slide 17 • April 25, 2012
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
What’s the bottom line?

• Look at the executive summary for the NPV,
  net benefits, BCR, or ROI.

ES, page 18




ES, page 19




                   Slide 19 • April 25, 2012
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
What does the report cover?


                           • Table of contents
                           • Section headings
                           • Tables
                           • Appendices




                   Slide 21 • April 25, 2012
Page vii
Step 2
Surveying the Landscape




       Slide 22 • April 25, 2012
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
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
Data for the CEO cost-benefit analysis
Evaluation
    • Three-year random-assignment study
Budgets
    • CEO financial statements
    • New York City budget documents
    • New York State budget documents
Interviews
    • CEO staff
Literature
    • Research literature on victimization costs

The data section is on page 56 of the CEO report.


                           Slide 25 • April 25, 2012
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
Perspectives in the CEO analysis




Page 67

             Slide 27 • April 25, 2012
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
Questions



               Use the chat
            feature to send us
              your questions.




               Slide 29 • April 25, 2012
Step 3
Looking at the Details




       Slide 30 • April 25, 2012
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
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
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
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
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
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
Step 4
Making Sense
of Your Surroundings




           Slide 37 • April 25, 2012
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
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
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
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
Uncertainty in the CEO analysis




Page 122

             Slide 42 • April 25, 2012
What are the study’s limitations?

The report should describe any limitations of
the analysis.




Page 56




Page 57



                    Slide 43 • April 25, 2012
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
Recap




        Slide 45 • April 25, 2012
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
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
1. Getting your bearings

• What’s the bottom line?
• What does the report cover?




                 Slide 48 • April 25, 2012
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
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
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
Questions




   Use the chat feature to send us your questions.


                  Slide 52 • April 25, 2012
Contact information


            Gary VanLandingham
       gvanlandingham@pewtrusts.org

               Joshua Rinaldi
             jrinaldi@vera.org
                212-376-5201




               Slide 53 • April 25, 2012
Sources

MDRC. (2012). More Than a Job: Final Results from the
  Evaluation of the Center for Employment
  Opportunities (CEO) Transitional Jobs Program
Vera Institute of Justice. (2012). The Price of Prisons:
   What Incarceration Costs Taxpayers




                     Slide 54 • April 25, 2012
This project is supported by Grant No. 2009-MU-BX K029
awarded by the Bureau of Justice Assistance. The Bureau of
Justice Assistance is a component of the Office of Justice
Programs, which also includes the Bureau of Justice Statistics,
the National Institute of Justice, the Office of Juvenile Justice
and Delinquency Prevention, and the Office of Sex Offender
Sentencing, Monitoring, Apprehending, Registering, and
Tracking. Points of view or opinions in this document are those
of the author and do not represent the official position or
policies of the United States Department of Justice.



                                                                Slide 55
Thank you!




        Slide 56 • April 25, 2012

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Making Sense of the Bottom Line: A Guide to Reading Cost-Benefit Reports

  • 1. Making Sense of the Bottom Line: A Guide to Reading Cost-Benefit Reports April 24, 2012 Gary VanLandingham, Director, Results First, Pew Center on the States Joshua 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 First Results First is partnering with states to assess and advance policy options that benefit residents and improve states’ fiscal health. Results First is an initiative of the Pew Center on the States and the John D. and Catherine T. MacArthur Foundation, with additional support 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 the U.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 that compares the costs and benefits of policies 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 process 1. 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 Reading Cost-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 1 Getting 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 18 ES, 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, 2012 Page vii
  • 22. Step 2 Surveying 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 analysis Evaluation • Three-year random-assignment study Budgets • CEO financial statements • New York City budget documents • New York State budget documents Interviews • CEO staff Literature • Research literature on victimization costs The 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 analysis Page 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 3 Looking 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 4 Making Sense of 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 analysis Page 122 Slide 42 • April 25, 2012
  • 43. What are the study’s limitations? The report should describe any limitations of the analysis. Page 56 Page 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. Sources MDRC. (2012). More Than a Job: Final Results from the Evaluation of the Center for Employment Opportunities (CEO) Transitional Jobs Program Vera 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 K029 awarded by the Bureau of Justice Assistance. The Bureau of Justice Assistance is a component of the Office of Justice Programs, which also includes the Bureau of Justice Statistics, the National Institute of Justice, the Office of Juvenile Justice and Delinquency Prevention, and the Office of Sex Offender Sentencing, Monitoring, Apprehending, Registering, and Tracking. Points of view or opinions in this document are those of the author and do not represent the official position or policies of the United States Department of Justice. Slide 55
  • 56. Thank you! Slide 56 • April 25, 2012