Update to Estimates of Economic Impact of BioDistrict New Orleans

Prepared by

Dr. James A. Richardson Alumni Professor of Economics Louisiana State University

With the assistance of

Mr. Roy L. Heidelberg Doctoral Candidate The Ohio State University

November 11, 2011

Dr. Richardson is solely responsible for the facts, findings, and conclusions presented in this report

Updated Economic Impact Analysis for BioDistrict

Model of the Economic Impact of the BioDistrict, New Orleans

The model for evaluating the economic impact of the BioDistrict is based upon two phases of impact: the construction spending leading to the economic enhancement of any region and then the consequent ongoing economic activities that sustains the economic impact on a continuous basis and, indeed, leads to further investments in the future which leads to additional ongoing activities. Figure 1 illustrates the logic of the economic impact process. The initial investments in infrastructure, new facilities, and other projects have an economic impact on the economy. The size and breadth of the construction required of the BioDistrict creates substantial impacts on the local and state economy. More significantly, however, are the consequent activities that are enabled by the construction of new infrastructure and buildings.1 This activity yields sustained economic activity, and where successful, this kind of activity can motivate even more construction, which can lead to additional ongoing economic activities. This creates a development cycle that provides for a secure, sustainable, and dynamic economic environment in a locality or region.

Figure 1. Flowchart of Economic Impact

In this analysis, infrastructure refers exclusively to the street improvements along Claiborne, Poydras, Tulane, Galvez, Broad, Earhart, and Bank.

Updated Economic Impact Analysis for BioDistrict

Economic Impact of Construction Phase of Development of BioDistrict in New Orleans

An economic development district such as the BioDistrict New Orleans always begins with a substantial investment to create new and dynamic facilities. Some of this investment will be public, such as the investment in the VA Hospital by the United States Government and major improvements in the districts infrastructure. Some will be mixed funding, such as the University Medical Center, with some of the investment coming from the federal government as part of the Katrina reimbursement process, some from the commitment of the state, and some from private sources. Some activities will be motivated by public incentives to encourage private investment, such as tax incentives. Finally, there will be private investors who sense a chance to make a competitive rate of return on their investment and are prepared to take the chance. All of these activities are essential to the long-term development of any region. Public investment can initiate the process and provide the economic environment that induces private investment; but public investment by itself cannot permanently sustain a growing economy. Private dollars must be invested in the city in order for the growth to be sustained. The construction activity in the first three to four years will create a noticeable surge in the economy. Economic impacts related to the projected construction activity over the next twenty years are illustrated in Table 1 by institution and source of capital expenditures. We have selected to focus first on the first 5 years since this is the time period in which the VA Hospital and the University Medical Center will be constructed. In addition, it is expected that other centers for higher education in the area, including Tulane, Xavier, and Delgado Community College, will also expand their medically-oriented activities. We had to assume how much of the direct construction spending will be spent on the construction of the facility and how much on equipment within the hospital facilities. It is estimated that just around 60 percent of the total spending would be direct construction spending in the New Orleans region with the remainder spent on equipment and other hospital features that will be constructed out-of-state. We then focus on projected private activities occurring in the next twenty years based on information provided by AECOM and other consultants involved in creating a master plan for the BioDistrict. Private investments will include medically-related enterprises, customary retail centers, and residential units. Private investments will be market-driven. Other facilities will be built during this time period, though these projections are not quite as assured as the expenditures on the hospital facilities. New construction activity during the first five years will create on average over 7,000 jobs per year in construction, services, trade, financial services, manufacturing, and other such sectors. About 42-45 percent of the jobs will be in the construction sector. Over the first five years of construction activity, almost $1.6 billion will be locally invested in buildings and structures in the BioDistrict New Orleans, not including major equipment purchases. This will lead to overall local economic activity of over $3.3 billion, over $1.1 billion in personal earnings, and net new state and local tax collections of roughly $142 million. In years 6 through 10, Tulane University, Xavier University, and LSU Health Sciences expect additional construction spending. Private spending is projected to increase in response to higher demand for housing and quality of life amenities as the population increases as well as medically related enterprises. It is anticipated that the total investment spending during this five-year interval will approach $640 million. Net new construction spending over this five-year period will support on average about 2,800 jobs per year with total economic activity amounting to almost $1.3 billion and personal earnings of about $426 million. State and local tax collections related to the construction activity are estimated to be approximately $54 million. For years 11 through 20 new construction activities will create and support on average 2,130 jobs each year. Net new construction spending

Updated Economic Impact Analysis for BioDistrict

during this ten-year period is estimated to be $980 million resulting in total economic activity of $1.9 billion, personal earnings of almost $650 million, and state and local tax collections of $82 million. Table 1 shows the construction activities by major investment project with the total investment, overall business activity, personal earnings, jobs per year created and supported, and state and local tax collections for the first five years, the sixth to tenth years and the eleventh through twentieth years of activity in the BioDistrict. In Table 2 the summation of personal earnings, local tax collections, and state tax collections are noted for the first five years of activity, the first ten years of activity, and the entire 20 years of activity. After 5 years of investment personal earnings will sum to over $1 billion and state and local tax collections will amount to over $140 million; after 10 years personal earnings will sum to over $1.5 billion and state and local taxes will sum to almost $200 million; and, after 20 years of investment personal earnings related to the construction activity will sum to almost $2.2 billion and state and local tax collections to over $280 million. The construction activity is temporary in the sense that the VA Hospital, University Medical Center, and other major facilities will only be built once. Thus, the major construction expenditures are completed in the first five years, but additional investment will continue for the next fifteen years. The major hospitals in the area or the universities in the area will complete some of this investment, while some of the investment will be by private businesses either taking advantage of the medical expertise in the area or providing goods and services to the persons working with the major medical enterprises. If the BioDistrict is a major success, it will be very normal to see net new construction each and every year. It almost surely will not reach the same level of expenditures as the initial investment, but it will be consistent and sustained. The completion of the construction phase of the projects then leads to the sustainable ongoing operations of the facilities and the permanent contribution to the New Orleans economy. The construction impact is significant, but temporary. The ongoing operations of the facilities provide a permanent enhancement to the New Orleans economy and initiate a new industry in the overall economic structure of New Orleans and Louisiana.

Updated Economic Impact Analysis for BioDistrict

Updated Economic Impact Analysis for BioDistrict

Ongoing Operations in the BioDistrict New Orleans The BioDistrict New Orleans includes the LSU Health Sciences Center, the Tulane University Medical School, the Tulane University School of Public Health, Xavier University with its College of Pharmacy, the BioInnovation Center, the Louisiana Cancer Research Center, the proposed site of the new VA Hospital, and the proposed site of the University Medical Center. It also includes other employment centers such as the New Orleans government complex, retail and commercial establishments, and restaurants. The focus of this economic impact analysis is to estimate the jobs that will be saved or created due to the development of BioDistrict New Orleans over this twenty-year time horizon. These economic activities will add to the existing businesses that now operate in the BioDistrict. It is estimated that, as geographically designed, the area that makes up the BioDistrict New Orleans supports just over 70,000 employed persons in all sectors of the economy.2 These jobs include work in medical-related institutions, in city government, in the judiciary, and in food service, retail, personal services, and other jobs that support a community. Institutional employment, including the universities, health care facilities, and government, amounts to almost 15,000 persons currently with approximately 7,600 students in the BioDistrict presently. The hospitals and universities employ just over 9,000 persons and accommodate these 7,600 students.3 The Tulane Hospital and the LSU Hospital currently employ just over 4,300 employees. The economic impact of this projected development is summarized in Table 3. We examine the projected new employment after 5 years, 10 years, and 20 years. The estimated direct employment will include jobs (saved and newly created) in the VA Hospital and the University Medical Center as well as other newly created jobs in the biomedical industries and other new start-ups related to the development of the hospitals. Indirect jobs created due to the expansion of the hospitals will be within the New Orleans area, but not necessarily in the BioDistrict itself. This net new employment includes the economic activities at the VA Hospital and the University Medical Center as well as other developments that are projected to locate to New Orleans in order to make use of the technological demands of the BioDistrict or to provide support to the medical-related industries. In Table 3 we show personal earnings and state and local tax collections as of Year 5, Year 10, and Year 20. Direct jobs are expected to grow from 8,800 in Year 5 to over 21,000 direct jobs in Year 20, an increase of over 12,000 jobs. Overall direct and indirect job growth is estimated at over 22,600 new jobs due to the development of the BioDistrict from year 5 to year 20.

Information derived from the Louisiana Workforce Commission for the fourth quarter of 2009. These employment data include all sectors of the economy from mining and utilities to accommodations and food services, as well as Health Care and Social Assistance. 3 Institution employment data, GCR and Associates. Includes students at Xavier University, Tulane University, and the LSU Medical Center in New Orleans.

Updated Economic Impact Analysis for BioDistrict

Adding the VA Hospital and the University Medical Center plus the associated private developments will create and save an estimated 8,800 jobs in this economic development district within the first five years. We are assuming that expanded ongoing economic activities will be initiated in the third year after the construction activities have begun and this is in addition to the jobs currently in the BioDistrict that will be saved due to these investments. These 8,800 direct jobs lead to about 11,475 total jobs, including direct and indirect. These direct jobs will come from the VA Hospital and UMC as well as other medical enterprises expected to become interested in investing in the New Orleans BioDistrict and other new businesses that start up in the BioDistrict because of the market opportunities. The activity will also spur an increase in personal earnings of $546.7 million as well as infuse state tax collections with $39.3 million and local tax collections with approximately $30.1 million. It is expected that the enhanced medical providers can secure additional NIH funding or other sources of grants, generate new medical facilities, and foster various business enterprises; this will also add to the direct jobs, personal earnings, and state and local tax collections. We have assumed a very modest increase of 3,360 new direct jobs from the fifth year to the tenyear horizon which would either increase or decrease depending on the ultimate level of investment and quality of implementation and economic development efforts. If major health care services are being offered in New Orleans, major research projects ongoing, and a critical mass of health care professionals practicing in the area, then it is reasonable to expect private investment to follow. In addition, there will be other investments in the BioDistrict to provide goods and services to the people employed in the district such as eating establishments, financial institutions, convenience stores, and other professional services. This is a piece of the puzzle that will require very close monitoring and examination. At this time we are estimating, very conservatively, 3,360 net new direct jobs based on employees per square foot of expected construction. Over a ten-year period, once the projects are fully operational, the BioDistrict New Orleans investments will spur an estimated 12,160 direct jobs and a total of 19,036 net new jobs, both direct and indirect. After 20 years it is estimated that 21,168 net new direct jobs will have been created or saved in the BioDistrict New Orleans. This suggests an economic impact of creating 34,085 net jobs including the direct and indirect jobs. The increase of the new direct and indirect jobs of 34,085 will be a net increase in employment of the regionthat is, while there are currently 70,000+ jobs in the BioDistrict, after the improvements the district will consistently employ over 100,000 persons. Just as we divided net new jobs created between direct jobs and indirect jobs, we could divide personal earnings between those earnings connected to net new direct jobs and associated business income and those earnigns connected to the net new indirect jobs and the associated business income. By the fifth year of development in the BioDistrict the direct jobs are accounting for over $436 million and the indirect jobs are accounting for just over $110 million in personal earnings. By the tenth year of ongoing operations in the BioDistrict the net new direct jobs are projected to be accounting for just over $733 million of personal earnings and the indirect jobs are accounting for almost $370 million of personal earnings. Finally, by the twentieth year of development of the BioDistrict net new direct jobs are projected to account for over $1.6 billion of personal earnings and the net new indirect jobs are projected to account for almost $900 million of personal earnings. In Table 4 the summation of personal earnings, state tax collections (including sales, personal income taxes, corporate taxes, excise taxes, and the array of other state collections) and local tax collections (including primarily property and sales taxes) from ongoing operations are presented for the first five years of operations, the first ten years of operations, and the first twenty years of operations. The New Orleans area will be boosted by net new personal earnings of $1.336 billion within the first five years of the operations of these facilities, $5.823 billion within the first ten years, and $23.996 billion within the first twenty years of operations. Net new state tax collections will add

Updated Economic Impact Analysis for BioDistrict

up to $97.6 million over the first five years of operations, $425.1 million over the first ten years, and $1,751.7 million over the first twenty years of operations. Finally, local tax collections will add up to $73.5 million over the first five years of operations, $320.3 million over the first ten years, and $1,319.7 million over the first twenty years of operations of the developments in BioDistrict New Orleans.

Summary and Conclusions

The BioDistrict New Orleans will encourage and promote medically oriented enterprises in the New Orleans area. Through the establishment of major medical services, the acquisition of medical research grants and contracts, and the development of new medical products by New Orleans institutions, an environment of sustained economic growth can be achieved in the city. A surge of economic activity related to construction during the first five years of development will create an average of over 7,300 net new jobs annually over this time period. Additional construction will develop as new businesses locate in the BioDistrict New Orleans. But the ultimate focus is on the permanent activity established as a consequence of the construction. Adding the VA Hospital and the University Medical Center, as well as other projected developments in the BioDistrict New Orleans, will create and save an estimated 8,800 permanent jobs in the first five years of operations. These 8,800 direct jobs lead to about 11,475 total jobs, including direct and indirect. Personal earnings of $546.7 million will be created and/or saved, infusing state tax collections with $39.9 million and local tax collections with approximately $30.1 million by the end of the fifth year. Over a ten-year period, once the projects are fully operational, 12,160 net new jobs will be directly stimulated by the BioDistrict New Orleans investments for a total of 19,036 jobs, both direct and indirect. After 20 years it is estimated that 21,168 net new jobs will have been created or saved directly through the BioDistrict New Orleans. This activity will also spur indirect employment for a total job creation of 34,085 net jobs including the direct and indirect employment. The economic impact of the combined construction activities and ongoing operations in the BioDistrict can be summarized in terms of employment, personal earnings, and net new state and local tax collections, as illustrated in Table 5. Construction employment is substantial; however, the employment associated with the ongoing activities of the BioDistrict New Orleans is ultimately larger. Including both construction impacts and the subsequent ongoing operations, there will be 18,787 jobs after five years of activities, 21,832 after 10 years of activities; and 36,215 after 20 years of operations. The economic impact of the construction activities and the subsequent ongoing activities are illustrated in Figure 2; this figure shows the sustainable path that is expected to be associated with the continued development of the BioDistrict in terms of jobs, personal earnings, and state and local tax collections as outline in Figure 1 in the introduction to the economic impact process. If the BioDistrict develops as these projects are anticipated, then the BioDistrict will generate economic activity in the range of 1 percent of the entire states economy.

Updated Economic Impact Analysis for BioDistrict

One final observation is that the medical economic development districts in Houston, Birmingham, Cleveland, and LaJolla have paid off handsomely with over 50,000 jobs being connected to the medical districts. But this payoff did not come in a day or twoit is the result of a long-term and sustained commitment. We did not project the same growth pattern for New Orleans as have occurred in other medical districts, but this is not to say that this higher level of growth cannot be obtained.

Figure 2. Annual Economic Impact of BioDistrict over Twenty Years (in millions of dollars, except for employment)

Updated Economic Impact Analysis for BioDistrict

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