Step 1. Identify and measure benefits.

Step 2. Identify and measure costs.

Step 3. Compare costs and benefits.

Step 4. Draw conclusions.

Step 5. Publicize results.

Each of these steps is addressed below.

STEP 1. IDENTIFY AND MEASURE BENEFITS.

a. MISSION AND MATRIX. Effective management of a large organization requires a clearly defined and well-understood statement of the organization’s mission. In written form, however, the relationships among the goals and objectives of the mission can easily be lost. For urban libraries, mission statements typically focus on patrons and services. Visualizing the mission statement as a matrix of classes of patrons and categories of library services makes explicit the relationships among the components of a typical urban library’s mission. By identifying classes of library customers or constituents (e.g., households, schools, businesses, not-for-profit organizations, etc.) the matrix is customer-focused. By arraying customers against the library’s portfolio of services, the processes through which the library serves its customers become visually explicit. An example of a simple service/user matrix follows.

Each of the cells of the matrix represents a stream of benefits from a library service to a particular class of customer.

Not all of the benefits provided by the library are service-specific. Therefore, not all library benefits can be associated with individual cells of the matrix. For example, the library may provide a safe place for children to meet after school. The library may have value as a place where the neighborhood comes together on an informal basis. Also, some benefits of libraries are collective in nature. For example, libraries are one-stop vendors of information. Rather than having to visit specialized sellers of books or videos or computer services, libraries provide agglomeration economies to patrons by providing a figurative shopping mall of information services all under one roof. Such convenience may provide customer benefits by reducing the transaction costs of piecemeal acquisition of the information they seek.

b. MEASURING BENEFITS TO USERS

Benefits can be classified as direct or indirect, and as individual or collective. Libraries provide benefits directly to library patrons through their services. For example, the recreational enjoyment received by reading a novel and the professional advantage enjoyed by a business that researches a new market for its products are direct benefits to these users of library services. Libraries provide indirect benefits as well. Enhanced reading skills for a young girl participating in a summer reading program may be passed on to her prodigy in later years. Indeed, the whole citizenry may benefit indirectly from enhanced reading skills for its youth.

Individual users can cite specific benefits that accrue to them through the use of specific library services. For example, a household that checks out and views a videotape receives benefits directly and individually. Collective benefits accrue to all members of the neighborhood, however, if the very presence of the local library or library branch instills a shared sense of community and pride.

The primary purpose of this study is to estimate a lower bound for the benefits provided by the library by focusing on the direct individual benefits provided by the library to specific classes of users. Clearly if this lower bound encompassing only direct individual benefits is close to or exceeds annual taxpayer contributions, total benefits must greatly exceed annual taxpayer contributions. In a pilot project for St. Louis Public Library, the authors of this proposal demonstrated that direct individual benefits were several times annual taxpayer contributions.

c. ESTIMATES OF BENEFITS

Using sample surveys, this study employed three methods of estimating benefits to patrons from using library services:

Consumer surplus,
Contingent valuation, and
Cost of time.

Although information was collected regarding all three measures only the consumer surplus method and contingent valuation approaches were judged as appropriate to the problem.

Consumer surplus. Economists frequently use consumer surplus in policy studies. Consumer surplus measures the value that consumers place on the consumption of a good or service in excess of what they must pay to get it. How does this apply to libraries? While most library services typically are free or subject to only a minimal charge, library patrons must still exert effort and expend time to access those services. This effort represents an implicit price to the patron. Many alternatives to library services are sold in the marketplace. For example, households can buy novels rather checking out fiction from the library. Businesses can purchase CD-ROM databases or subscribe to on-line information services rather than research the data at a library. In this research, cardholders of each of the five participating libraries were surveyed about services that they use from their library. For example, patrons were asked how many books they borrow from the library, how many books they buy, and how many additional books they would buy if they could not borrow. By comparing the number of books a patron borrows with the number of books they would buy at a market price, one can calculate the value that the library patron places on borrowing privileges above and beyond any cost of accessing the library. This value is a dollar measure of the net benefits provided by the borrowing privileges. Such estimates were made for each patron and each service used. The estimates for each library were then summed to provide an estimate of total direct annual benefits measured in dollars.

Contingent valuation. While somewhat controversial, contingent valuation measures have been use to value public goods and environmental conditions. For example, contingent valuation analysis was the basis of liability claims in judicial proceedings against the Exxon Valdez to establish the dollar magnitude of damages to the Prince William Sound. Daniel McFadden, one of the 2000 Nobel Laureates in Economics, has been a contributor to the development of this methodology.

Two alternative approaches are available. In the willingness-to-pay approach (WTP), the researcher asks the respondent how much they would pay to have something that they currently do not have. In the willingness-to-accept approach (WTA), the researcher asks the respondent how much they would accept to give up something that they do have. Generally, WTA estimates of benefits are higher than WTP estimates. WTA estimates are usually considered less reliable.

In applying contingent valuation analysis to libraries, many alternative hypothetical situations can be used in the survey instruments. For example, library patrons (or the general public) can be asked how much they would be willing to pay rather than forego library usage or, if libraries did not exist, how much they would pay (perhaps, in taxes) to enjoy the library privileges they have today. Alternatively, patrons could be asked how much they would accept to give up their library privileges or how much of a tax cut they would accept in exchange for closing all public libraries.

The survey instrument used in this research solicited both WTP and WTA estimates for general users, but only WTA estimates for teachers and business users. In the pilot study, both teachers and business users refused to assume the role of agents for their schools or businesses and respond to WTP questions that hypothetically would commit their school districts or businesses to support the library financially. General users were willing to respond to WTP questions, but often refused to answer WTA questions. As in the pilot study, the reasons for their refusal to respond provide anecdotal evidence that the public’s support for libraries extends far beyond the private direct benefits reported in this research. Often their responses reflect the indirect social benefits to others that distinguish the role of the public library from market sources of similar services.

The literature on contingent valuation analysis suggests that one way to test the validity of the responses is to see if expected economic relationships are apparent in the data. Preliminary evidence from the St. Louis pilot study confirms that the data support such relationships.

Valuation of time. Yet another method of evaluating benefits is to assess the time and effort spent by patrons to access the library. Because patrons must exert time and effort to access library services, the value that they place on library services must be at least as great as their sacrifice in accessing and using them. By valuing patrons’ time in traveling to and using library services, one can estimate a lower bound for the value that patrons place on library services. The sum of these estimates across patrons provides an estimate of total library benefits.

Application of this method of estimating library benefits by valuing patrons’ time is problematic, however. How does one value children’s time? A self-employed entrepreneur’s time? Furthermore, if the patron would have purchased a similar service from a market source, would the transaction cost in terms of time spent been any less? Is it clear that time spent to execute a library transaction is any more or less an opportunity cost relative to other means of obtaining similar services? While the surveys used in this research solicited information on time spent in and traveling to and from the library, the value of time approach is not incorporated into the final results reported for the study.

Each of these approaches has its strengths and weaknesses. Ideally all three approaches would provide identical estimates of benefits. In the absence of such convergence, however, the alternative methods provide a range of values from which to infer the overall magnitude of benefits to library patrons.

STEP 2. IDENTIFY AND MEASURE COSTS.

The costs of providing library services consist of operating costs and capital costs. The operating costs include such expenses as staff salaries, maintenance, utilities, and security.

The first challenge is to value the library’s assets. The value of the library’s assets (capital stock) often is difficult to obtain because most libraries don’t maintain a balance sheet. (This calculation will have to be completed as part of GASB 34, a new accounting convention that requires all not-for-profits to create a balance sheet that treats all assets including capital investment in the same way as do for-profit companies.) If an inventory of library assets exists, it often carries the items at original cost. For the purposes of cost benefit analysis, the library’s capital stock should reflect current fair market value. One way of estimating the fair market value of the library’s real estate is to base the appraisal on "comparables," such as the value per square foot for similar or adjacent properties. Because this research seeks a conservative lower bound to the implicit rate of return, when faced with a choice of valuation methods, it is better to overstate the value of the assets rather than to understate it. No depreciation records were available for most library assets. For simplicity and to ensure a conservative estimate in step 3, the value of collections, furniture, equipment and vehicles most typically were valued at their undepreciated replacement cost.

STEP 3. COMPARE COSTS AND BENEFITS.

In simplest terms, taxpayers and officials want to know if the public is getting a good return on its taxes. This research reports the return to taxpayers in two ways. First, the study reports annual benefits per dollar of tax support. Second, the study reports the implicit return to the library’s stock of capital assets.

1.	Simplicity--Most voters understand the concept of a rate of return. The point can be communicated in a short sound bite: "For each dollar of taxes, city residents and businesses receive more than two dollars in benefits--a 100% return."
2.	Credibility—The methods are intentionally designed to provide a lower bound. Quantitative methods will use conservative pricing of alternative services. The study focuses only on direct benefits. Inclusion of indirect benefits and collective benefits would substantially increase the estimates.
3.	Rich detail—Library speakers can tailor remarks to specific constituent audiences by breaking out benefits into categories of users. Estimates of benefits by category of service can assist administrators in budget allocation and strategic planning.

This concept incorporates implicitly the idea of private-public partnership. Most public institutions leverage taxpayer support with funds from private contributions, foundation grants, and grants from levels of government above the local taxpayer. These funds magnify the services and corresponding benefits to local patrons beyond those that could be supported through local tax dollars alone. The return to annual taxpayer investment incorporates not only benefits funded directly through taxpayer dollars, but also the additional benefits made possible as those taxes are leveraged by funds from other sources. Without the taxpayer dollars, in most cases, there would be no services and no benefits. Tax support is the base that makes the existence of the institution, and hence its provision of services, feasible. The level of benefits, however, in most cases will be a multiple of those that could be supported only from tax dollars. In public presentations, one can elect to make the leveraging explicit or leave it as implicit, depending on the audience and the objective of the presentation. In the discussion that follows, all benefits are counted as part of the return to taxpayer investment.

STEP 4. DRAW CONCLUSIONS.

1.	Does the library provide services that are more valuable to its patrons than the annual tax support received? If so, how much more valuable on an annual basis?
2.	Does the library produce a return on invested capital assets that is comparable to returns on private investment?
3.	What types of users receive most of the benefits from library assets?
4.	What are the demographic characteristics of these beneficiaries? How do benefits received vary with income? How do benefits vary with respect to ethnicity or other characteristics such as age or size of household?
5.	Which library services provide the most benefits to users? How do these benefits compare to the cost of providing the services?

1.	Whether and how to justify a request for increased tax support;
2.	Whether and how to justify a proposal for funding from external grantors and donors;
3.	To evaluate the library’s success in reaching and serving targeted audiences in the community;
4.	To evaluate the library’s budget with respect to the efficient allocation of funds among programs and services;

STEP 5. PUBLICIZE RESULTS.

1.	Donors to the library’s foundation;
2.	Sponsors of grants;
3.	Charitable foundations;
4.	Governing officials and bodies such as mayor, council, or city (or county) administrator;
5.	Local public and private school boards;
6	Civic groups;
7.	Library patrons;
8.	The media and public at large, especially voters.

1.	The library has an important mission and is fulfilling that mission.
2.	The library returns more in benefits annually than taxpayers contribute.
3.	The library provides a substantial return to public investment.
4.	The library is an important partner to area business and educational institutions.

1.	The library’s board of directors or trustees;
2.	The library’s executive managers;
3.	The library’s staff.

1.	How the library should expand or refocus its services;
2.	Which services the patrons value most;
3.	Which groups of patrons benefit most from library services;
4.	How patrons perceive the role and attitudes of library staff.

The researchers assisted participating libraries in developing media tools for communicating messages to different audiences by such means as PowerPoint presentations or messages for the library web sites and by conducting workshops for library personnel at each site.

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Accomplishment of Research Plan>