Cost-Benefit Analysis for Foundations

On their face, foundation managers and government budgeting officers seem very different. One is focused on funding mission-based programs and the other is focused on paving roads and contracting for garbage pickup. One designs programs for the public while the other solicits input from the public for its programs. One serves the interest of private philanthropists, the other serves the interests of the public.

That being said, both private foundations and public budgeting offices face the same challenge: they must decide how to expend limited resources to fulfill a social mission. Whether it is reducing poverty, promoting economic growth, increasing educational attainment, improving public health, or any other social goal, both public-sector budgeters and private-sector foundations are interested in finding out the most effective way to make society better with limited resources.

One notable example of a foundation that has embraced this challenge of resource maximization is New York’s Robin Hood Foundation.

In 2017, Robin Hood spent $116 million on anti-poverty programs in New York City. Founded by hedge fund investors familiar and comfortable with quantitative methods, the foundation was inculcated from the start with a focus on what they call “relentless monetization,” a strategy that translates every benefit generated by their programs into dollar terms.

As Robin Hood economist and relentless monetization brainchild Michael Weinstein says in his book The Robin Hood Rules for Smart Giving,

A basic problem that plagues philanthropic decisions is that there is no natural yardstick by which to measure, and therefore compare, different philanthropic outcomes. Said another way, there is no one natural way to compare, for the purposes of fighting poverty, the value of providing job training to a would-be carpenter to the value of providing better middle school instruction.

So how does Robin Hood overcome this basic problem? They do it by using a tried and true method for comparing seeming incomparable options: cost-benefit analysis.

Robin Hood has created a playbook of 163 metrics, complete with equations designed to help suss out what the real impact of their programs are on their bottom line of reducing poverty in New York City. Some of these metrics are based off internal evaluation of their own programs, but most are pulled from comparable rigorous studies that are then applied to Robin Hood programs. These metrics are used to calculate the relative impact of different programs on their poverty-reduction mission.

The 168-page document looks a lot like the Washington State Institute for Public Policy’s benefit-cost database, full of equations and citations and addressing a considerable breadth of program options. While it does not include sensitivity analysis and focuses more narrowly on benefits accruing to program participants rather than society at large, Robin Hood’s metrics document does provide program officers with rigorous, relevant information about the relative cost-effectiveness of program options.

All this being said, Robin Hood’s scope is smaller than public sector players: its $116 million in annual spending is a drop in the bucket compared to New York City’s $139 billion in annual operating and capital spending. Even the largest foundation in the world, the Bill and Melinda Gates Foundation, only has a total annual budget of about half the size of the city of Phoenix’s total annual expenditures.

Nonetheless, foundations are getting more and more into the cost-benefit game. Savvy philanthropists and program officers who want to maximize their impact are turning to tried and true tools of applied economic analysis to guide budgeting decisions. And with more application of these tools, both program participants and results-oriented donors will be better off.