Cost-benefit Analysis:Cost-benefit Analysis: Return to Taxpayer Investment

in Public Libraries

Sponsored by

Institute of Museum and Library Services

Donald Elliott, Ph.D.

Professor of Economics and Finance

Southern Illinois University Edwardsville

October 16, 2003

Public Crises in America

Public-sector budgetary crisis– Declining state and local government revenues– Resistance to raising tax rates– Cuts in budgets for libraries, as well K-12 and

higher education, and even fire and police

Public Crises in America

Crisis of trust– In government– In business

Call for accountability– Recall of governor in California– Accounting oversight

Public Crises in AmericaIf an objective, external agency were to ask

your cardholders about the library services they receive, the value they get, and their willingness to support taxes for services, what would your cardholders say?

Could you use the results… – to improve the management of your library?– bolster budgetary support for your library?– How?

StudyStudy

Federally funded by a grant to St. Louis Public Library from the Institute of Museum and Library Services (IMLS)

Demonstrated previously… – at 5 major urban libraries– now 9 additional libraries in Texas, Washington state,

and Illinois, including 3 libraries in the Chicago area– Successfully replicated at St. Louis Public Library—

recipient of the IMLS grant Invitation from American Library Association to

publish study

PurposePurpose

Develop a practical, conservative, transportable methodology to estimate a lower bound for libraries’ direct return on taxpayer investment.– How much benefit do public library patrons

receive for each dollar of annual tax support?– What return do citizens get for the capital

invested in their public library?

MethodologyMethodology

Cost-benefit analysis– Measure dollar value of direct benefits to

library patrons– Measure library costs– Measure return to taxpayer investment

Benefits measured conservatively based on scientific surveys of local library users

METHODOLOGYMETHODOLOGY

Research question: How valuable is your public library to the community it serves?

Strategy: estimate defensible lower boundAnalytical tools:

– Cost-benefit analysis (CBA) – NOT economic impact analysis

Valuable to whom?Why? How much?

FRAMEWORKFRAMEWORK

Role of mission statementCustomer-focused

– WHOM do you serve?

Service focus– HOW do you serve them?

Framework for benefits: service-user matrix

SERVICE-USER MATRIXSERVICE-USER MATRIX

Taxonomy Households Teachers Business

Books x x x

Repair manuals

x

Staff help x x x

Financial x

Computer x x x

MEASURING BENEFITSMEASURING BENEFITS

Which benefits?– Direct

E.g., reading a book for pleasure

– Indirect benefitsE.g., impact on intergenerational literacy

How?– Units: dollars

MEASUREMENT TECHNIQUES: MEASUREMENT TECHNIQUES: CONTINGENT VALUATIONCONTINGENT VALUATION

Willingness to pay (WTP)– How much would a household pay to retain

access to the library?– Example: Suppose that public libraries did

not exist. How much would your household be willing to pay per year to establish your public library as it exists today?

Willingness to accept (WTA)

MEASUREMENT TECHNIQUES: MEASUREMENT TECHNIQUES: CONSUMER SURPLUS CONSUMER SURPLUS

Defining the market substitutes– Customer perspective, not librarian perspective– Example: dictionary

Pricing the market substitutes– Customer perspective, not librarian perspective– Example: encyclopedia or videotape

COMPARISON OF COMPARISON OF WTP AND CSWTP AND CS

Willingness to pay (WTP)– Based on willingness to pay taxes and fees– Negatively influenced by

Free rider problems Perceptions of tax equity Lack of control over mix of services produced

Consumer surplus (CS)– Item by item comparison in familiar shopping

format– Total spending confirmed by follow-up

question

INTERNET AND TELEPHONE SURVEYS

All measures require information available ONLY from library customers directly => surveys

Random sampling Conducted by university survey center Pre-announcement letter (Schaumburg)

– Respondents were invited to respond by Internet.– Anyone who had responded by Internet and had NOT notified the

library to decline was called. Post-incentives Household survey responses weighted to ensure against response bias Average telephone interview time: 15 minutes

SURVEY INSTRUMENTSURVEY INSTRUMENT

Framework designed by team of market researchers and economists

Branched and tailored by self-selected customer class: household and teacher Includes both categorical and open-ended questions

SURVEY INSTRUMENT:SURVEY INSTRUMENT:OverviewOverview

Greeting Verification of user categories General user questions

– Market substitutes– CVA

Demographic questions Teacher Anything else to say to library director? Thank you

RESPONSE RATESRESPONSE RATES

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Response rate

Joliet

Skokie

Schaumburg

SURVEY CONTEXTSURVEY CONTEXT

Only a year since 9/11. Worst national economic performance in a decade. Rising concerns over war with Iraq. Enron and other corporate scandals had shaken the

nation’s confidence. Even more conservative responses to questions

regarding library benefits and support for library taxes than would typically prevail.

MEASURING COSTSMEASURING COSTS

Benefits arise from services produced by– Current operating staff and outlays– Capital assets such as land, buildings,

furnishings, collections, computers, vehiclesAnnual operating costs: annual revenues less

capital outlays less end-of-year surplusCapital assets: valued at replacement cost

newNo consideration of depreciation

RESULTSRESULTS

Illinois Participating Libraries:

Joliet, Schaumburg Township, and Skokie

Cardholder Demographics Cardholder Demographics Available from SurveyAvailable from Survey

Education level of head of householdAge composition and size of householdComputer ownership and connectivityHome ownership EthnicityHousehold incomeDistance to library

COMPARE CENSUS AND COMPARE CENSUS AND CARDHOLDER CARDHOLDER

DEMOGRAPHICSDEMOGRAPHICSEven though there are striking differences

in the census demographics of the general populations, the differences among cardholder demographics are less distinct:– Income– Poverty rates– Education and occupation

Striking Differences in 2000 Striking Differences in 2000 Census DemographicsCensus Demographics

LIBRARY PER CAP INCOME

PERCENT POVERTY

PERCENT PROFESSIONAL

Joliet $19,390 8% 28%

Schaumburg $30,587 2% 44%

Skokie $27,136 4% 46%

Differences Among Cardholder Differences Among Cardholder Demographics Are Less Distinct.Demographics Are Less Distinct.

LIBRARY AVERAGE HOUSEHOLD

INCOME

PERCENT ADVANCED

DEGREE

PERCENT COMPUTER OWNERSHIP

Joliet $49,440 13% 78%

Schaumburg $50,499 23% 93%

Skokie $47,318 33% 83%

But there are substantial differences among the three libraries in funding, capital assets, and benefit levels…

Library Operating Funds and Library Operating Funds and Assets Per Active HouseholdAssets Per Active Household

LIBRARY OPERATING FUNDS ASSETS

Joliet $250 $2,350

Schaumburg $325 $2,700

Skokie $350 $1,350

Yet, all three libraries provide a positive net return to local operating funds and to community capital investment.

Range of Returns to Taxpayer Range of Returns to Taxpayer Investment for 3 LibrariesInvestment for 3 Libraries

Returns to local operating revenues– Based on WTP, $1.04 to $1.24.– Based on consumer surplus, $1.22-$1.87.

Returns to community investment in library assets– Based on WTP, 1% to 3%.– Based on consumer surplus, 6% to 10%.

Conservative Because:Conservative Because:

Study captures benefits to cardholders only:– No walk-ins– No third party beneficiaries

Consumer surplus estimates:– Use conservative pricing– Count benefits only if would substitute

Capital valuations exclude depreciation

Results by Type of Patron and Results by Type of Patron and by Type of Serviceby Type of Service

Measurement of Benefits:

Households

Educators

Who Benefits?Who Benefits?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Joliet Schaumburg Skokie

Educators

Households

Analysis of Services Used by Analysis of Services Used by HouseholdsHouseholds

Services– Staff help– Magazines and

newspapers (domestic and foreign)

– Books for adult readers– Computer services and

classes– Electronic information

services

– Reference materials– Audio and visual

media– Programs for adult

patrons– Children’s books– Programs for children

Analysis of Services Used by Analysis of Services Used by HouseholdsHouseholds

Analyses– Breadth of use

What percentage of households use the service?

– Depth of use What percentage of households would pay to

replace the service?

– Contribution to value What percentage of household benefits is

contributed by the service?

Skokie: Contribution to Household Benefits by Type of Service

BOOKS 33%

MAGAZINES & NEWSPAPERS

9%

SPECIAL EVENTS 1%CHILDREN'S PROGRAMS

1%

DISKS AND TAPES27%

COMPUTERS4%

REFERENCE 0%

ELECTRONIC INFORMATION

1%

CHILDRENS' BOOKS23%

STAFF 1%

Schaumburg: Benefits to Schaumburg: Benefits to TeachersTeachers

Library ServicePercentage of teachers using

service

Staff help 22%

Magazines and newspapers 13%

Children’s books and programs 53%

Books and programs for adults 31%

CDs, DVDs, and tapes 38%

Library computers or computer classes 12%

Electronic information sources 17%

Encyclopedias 19%

Results—An ExampleResults—An Example

Active users of Joliet Public Library include:– Over 9500 households– Over 900 teachers

At least 78% of all benefits to the community accrue to households, while as much as 22% of benefits arise from library services used by teachers to supplement educational resources in the community.

Results--householdsResults--households

Households report, on average, that the services they use are worth – more than $235-$389 per year per household. – more than $2.25-$4.35 million per year.

Households place the greatest value on adult and children’s books and audio and visual media. – 32 cents of each dollar attributable to books for

adults– 27 cents to children’s books– 21 cents to audio and visual media.

Results--teachersResults--teachers

Over 9% of cardholding households include a teacher who uses Joliet Public Library

Library services save schools and teachers, on average, more than $700 each per year.

Supporting services to teachers and schools are worth almost $640,000 per year.

Results--teachersResults--teachers

Educators use and value children’s books, audio and visual media, and electronic information services much more than general households.

Educators are less likely to use staff help.

ResultsResultsFor each dollar of taxes contributed annually to

the Joliet Public Library, its patrons receive benefits of more than one dollar.

If outlays used to build library collections, new furniture, equipment, buildings, and other capital assets are excluded, patrons receive benefits of more than $1.24 for each dollar of operating outlays.

An alternative method of measuring benefits suggests benefits of at least $1.87 for each dollar of operating outlays.

Each dollar of local operating Each dollar of local operating outlays produces $1.24-$1.87 outlays produces $1.24-$1.87 of benefits to library patrons.of benefits to library patrons.

$1 in taxes

$1.24-$1.87 in benefits

Generations of Joliet citizens have sacrificed to build Joliet Public Library.

Today the Library’s capital assets would cost over $22.5 million to replace.

Each dollar invested in library capital yields an annual rate of return of more than 3% in benefits to the patrons that it serves.

An alternative method of measuring benefits suggests an annual rate of return of at least 9%.

ResultsResults

Joliet, Schaumburg, and Joliet, Schaumburg, and Skokie cardholders view their Skokie cardholders view their

libraries aslibraries asessential community assetsessential community assets

and and productive investmentsproductive investments of of

their tax dollars.their tax dollars.

Joliet, Schaumburg and Joliet, Schaumburg and Skokie LibrariesSkokie Libraries

Sound Investments

in

People!

For additional information:For additional information:

See St. Louis Public Library website http://www.slpl.lib.mo.us/using/research.htm– Dr. Glen Holt– Dr. Leslie Holt

E-mail– Professor Donald Elliott, Southern Illinois

University Edwardsville– delliot@siue.edu