THE BLOG
07/12/2013 02:26 pm ET Updated Sep 11, 2013

Nonprofits and the Cost Benefit Solution

When President Obama recently proposed an ambitious scientific effort to build a comprehensive map of the human brain's activity, he cited the Human Genome Project as a model.

Every $1 that the government invested in that effort returned $140 to the American economy, he said, because of new insights and treatments for many diseases that had previously been untreatable.

The same kind of cost-benefit analysis used to justify the government's investment in medical research can -- and should -- be applied to the myriad social services that governments at all levels contract out to private agencies.

Do the taxpayers' dollars spent on drug treatment, homeless services, housing subsidies and programs to counter recidivism produce a return on investment? Do they improve people's lives and reduce government costs in the long run? In other words, does money spent now on social services return more to the economy in the future, just as the Humane Genome Project did?

I would argue that they clearly do. The best of our nonprofit agencies carefully track the outcomes of the social services they provide. They know what happens to their clients and they can account for how the improvements in their clients' lives -- sobriety, staying out of jail, finding a full-time job or permanent housing -- provide long-term economic benefits both to individuals and to society.

It's difficult and costly, though, to rigorously analyze a nonprofit's costs and the benefits its services produce. Too few organizations track outcomes or calculate the financial returns on what they spend. Yet it has never been more critical to do so.

In an era when states and the federal government are slashing spending, elected officials find it particularly difficult to even contemplate new investments in social services. But the truth is that they have seldom been needed more. Investing wisely now will pay enormous dividends in the future.

We are, of course, a capitalist country. Corporations are judged by their ability to generate revenue and return money to investors. But most nonprofits that contract with government are not required to produce verifiable results or show how their efforts save money in the long run. It's no surprise that taxpayers view us skeptically. We need to demonstrate that the cost of the services we provide carries significant economic benefits.

Here's a small, but telling example of how small investments can produce big returns, socially and financially. New York City spends $1 billion a year to shelter its growing population of homeless people. A pilot program in two of the poorest neighborhoods in the South Bronx, Mott Haven and Highbridge, assembled significant new resources to assist families in danger of becoming homeless. Over a number of years, unusually thoughtful and aggressive legal and social service assistance was marshaled to intervene early in the eviction process, in the hope that it would enable families to avoid becoming homelessness.

Every $1 invested in the legal interventions saved $1.60 in spending on city homeless shelters, according to a study in 2010 by SeedCo, a nonprofit that promotes economic opportunities for the disadvantaged, and the New York City Department of Homeless Services. In a single year, 2009, the city saved an average of $30,700 that it would have spent to shelter each family that would have become homeless, or $737,370 overall, if not for the pilot program's interventions. That saving was nearly $300,000 more than the program's annual cost, or a return on investment of 64 percent.

The study also estimated that the social services provided by this experimental project resulted long term in another $2 saved for each $1 invested.

Our nonprofit, The Doe Fund, has long believed it is vital to calculate the financial benefits of our work, both to the single homeless men who are our clients, and to the governments, foundations and thousands of individual donors who support us.

The majority of our trainees have served time in jail or prisons,and nearly all have a history of drug or alcohol abuse. When they complete our residential program after a year of paid transitional work and training, obtaining a job and their own place to live, they provide extraordinary savings to taxpayers. And they improve their own lives immeasurably.

Perhaps the biggest financial benefit involves savings in the enormous cost of operating jails and prisons. Nationally, cities and states cumulatively spend more than $50 billion a year on incarceration, according to the National Association of State Budget Officials. New York State alone spends more than $3 billion annually.

A huge portion of that expenditure involves recidivists, offenders who are released and then get sent back to prison within a short time. In New York State, about 40 percent of released offenders are back in prison within three years.

Reducing that rate holds enormous economic promise. Bruce Western, a Harvard University sociology professor who is an expert on criminal justice, determined in a study a few years ago that graduates of The Doe Fund's Ready, Willing & Able program are 60 percent less likely than other former offenders to be convicted of a felony within three years of their release.

This makes common sense. A real job and a reconnection with family and community can help ground an ex-offender, making it less likely that he will violate parole or commit new crimes.

But former offenders have a hard time finding work after leaving prison. Studies by the Urban Institute and the National Bureau of Economic Research found that the unemployment rate of people with criminal records is 35 percent to 65 percent higher than the rate for similar people who do not have a criminal record - that is, people without a high school degree.

Graduates of our program get a demonstrable boost in their earnings, compared with similar men. A study released last year by the consulting firm of Marks, Paneth & Shron calculated that our graduates will earn collectively an extra $13 million to $30 million more each year over their lifetimes than they would have if they had not completed the program.

There are many other social and governmental savings when homeless men and former offenders find work and turn their lives around. When the crime rate goes down, so do the costs for policing, maintaining courts and legal representation. Housing a single homeless man in a New York City shelter costs more than $18,000 a year.

Altogether, the consultants' study found that spending by The Doe Fund's programs yields a cost-benefit ratio of between 2.3 and 3.6: each $1 spent by the organization produces quantifiable benefits of as much as $3.60.

There are other, unquantifiable savings. We know that ending the cycle of recidivism can affect several generations of a family, but it's not possible to calculate the financial benefit. Nor is it possible to estimate the savings to potential victims of crime when ex-offenders become law-abiding, tax paying citizens.

Investing in social services that improve people's lives is nearly always the right thing to do. It's also a smart thing.

When money is invested wisely and efficiently in capable organizations, it can yield remarkable returns. Governments can save significantly over time, and they can use those savings to lower taxes and invest in vital services.

Harriet McDonald is the executive vice president of The Doe Fund.