It's very refreshing to see in the following article by Susan K. Urahn that one of the most fundamental financial concepts, return on investment, is becoming an essential element of government spending plans. It is clear that even governments no longer have enough money today to just throw it at make-work projects to create jobs that are a bridge to nowhere. This analytical approach also has been a means of breaking partisan gridlock, a byproduct that also is sorely needed. Unless the government does its homework so that each dollar generates a high return for the taxpayer it shouldn't take the money.
Susan K. Urahn is managing director of the Washington, D.C.-based Pew Center on the States, where she leads the Pew Charitable Trusts' efforts to help states identify and implement policies that are fiscally sound and provide a return on investment to taxpayers.
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The Cost-Benefit Imperative
A group of states is adapting a successful model to target scarce funds for the greatest return on investment.
While the states' revenues are beginning to recover, almost all of them expect to have less to spend in 2012 than they had in 2008, before the Great Recession began exacting its toll. Since then, many states have relied on across-the-board cuts, but others have looked for ways to make more strategic decisions that target funds toward programs and policies that yield the greatest benefits in the most cost-effective way.
Cost/benefit analysis can play a key role in helping government leaders make better decisions on allocating limited tax dollars. This technique estimates the long-term costs and benefits of potential investments in public programs, allowing policy makers to compare options and identify those that most effectively achieve outcomes (such as reducing crime, improving high-school graduation rates or reducing child maltreatment) at the lowest cost to taxpayers.
Cost/benefit analysis has been used to a limited degree at the federal level for many years. Some states, including Oregon, Georgia and New York, have used this technique to assess individual programs, such as evaluating whether an economic development incentive is cost-effective in creating jobs. But one state has developed an approach that goes much further.
Since the 1990s, legislators and executive agencies in Washington State have used a cutting-edge model to identify evidence-based policies that provide the best return on taxpayers' investment. The model was developed by the nonpartisan Washington State Institute for Public Policy, which the legislature created to analyze and provide data for policy makers.
The model goes far beyond traditional methods. It:
• Analyzes all available research across an entire policy area to systematically identify which programs work and which don't, rather than relying on a few studies or anecdotal evidence.
• Predicts the impact of policy options by applying the combined evidence of all sufficiently rigorous national studies to the state's own data.
• Calculates the potential return on investment of policy options, taking into account the effect on taxpayers, program participants and residents most directly affected in both the short and long term.
• Assesses the investment risk if the initial assumptions behind the estimates turn out differently than predicted.
• Ranks the projected benefits, costs and risks of all programs in a guide to policy options.
• Identifies ineffective programs that could be cut or eliminated so that policy makers can make strategic decisions instead of across-the-board reductions.
• Analyzes the combined benefits and costs of a package or "portfolio" of policies instead of judging each program separately.
• Works with legislators and the executive branch to make these analyses highly accessible for policy and budget decision-makers.
Washington State's most extensive experience with this model has been in the criminal-justice arena. Officials have used the analysis and recommendations generated by the model to direct funding toward proven crime-prevention and treatment programs. Those initiatives have contributed to a greater improvement in crime rates and juvenile-arrest rates compared with the national average, an incarceration rate lower than the national average, and savings of $1.3 billion per two-year budget cycle—eliminating the need to build new prisons and making it possible to close an adult prison and a juvenile-detention facility.
Legislators from both parties say the model has helped them get the best return on investment, transcend partisan gridlock, make decisions based on facts and choose options that are the most cost-effective in the long run, even if they are not the most politically appealing in the short term.
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