Risky Venture, Low ROI

Editor's Note: The following includes the full text of the Collier County Productivity Committee's “Economic Viability of Jax-Florida,” an analysis of whether investing $130 million of Collier County taxpayers' money to open a branch of Jackson Laboratory is a sound investment.

Jackson Laboratory decided late last year to pull out of talks with Collier County. The report contributed to that decision.

Economic Viability of Jax-Florida

A) What are the potential benefits of establishing Jax-Florida in Collier County?

1) Potential benefit from diversification.

Collier County's economy currently relies primarily on tourism, agriculture and construction. The county needs to attract sustainable high technology, high-wage jobs that are less affected by economic downturns of tourism and construction to diversity and stabilize our economy.

The plan is for Jackson Laboratory to establish Jax-Florida in Collier County to provide genetic research and personalized medicine health care and to anchor a biomedical research complex that would draw other high-tech, medical-related companies here — to provide the needed economic diversity and stabilization.

2) Potential benefit from infusion of millions of dollars into the local economy.

Through the Innovation Incentive Program, the Legislature has spent about $450 million to bring seven major biotechnology research institutes to the state to improve Florida's economy.

With local matching funds, Florida is spending nearly $1 billion to finance catalysts for economic growth. If Scripps Research Institute (funded prior to the Innovation Incentive Program) is included, more than $1.5 billion is being spent.

Now the Legislature has offered $130 million to bring Jackson Laboratory to Collier County. We would need to provide $130 million in local matching funds, and Jax-Florida expects to raise $290 million over the next 10 years from donations, grants from the National Institutes of Health (NIH) and service and education revenues.

The flow of outside money into Collier County could equal about $420 million ($130 million from the state and $290 million through Jax-Florida) over the 10-year period, with a large part of that money being spent right here.

3) Potential benefit from jobs created as a result of Jax-Florida.

The expectation is that Jax-Florida would act as an anchor to bring other not-for-profit organizations, a hospital, medical school and/or graduate school department, charter high school and for-profit biomedical research companies to the complex at Ave Maria. These new direct jobs, as well as indirect support and induced jobs, would be expected to bring substantial economic benefits to Collier County.

The Washington Economics Group (WEG) prepared “A Brief: Economic Impact and Return on Investment to Collier County, Florida from the Jackson Laboratory - Florida, dated July 9, 2010.”

Its analysis estimated the potential economic impact, specific to Collier County, to be an average employment of 5,891 jobs, with resulting gross domestic product of $10.6 billion over 23 years.

According to the WEG report, at build-out in 2032, an estimated 11,490 new jobs would be created and the earnings of these employees would be nearly $1 billion per year. WEG conclusions are evaluated in paragraph D4.

An earlier WEG report that evaluated the economic benefits within Florida indicated that there would also be substantial regional benefits. While not separately quantified, the benefits to Lee County, due to spillover effects, would also be very significant.

4) Potential benefits to existing Collier County residents.

In addition to the potential economic benefits discussed above, Collier County taxpayers can expect to benefit if other businesses come here to establish a robust biomedical research complex. They will help to:

• Create an improved and more stable economy, and an environment for other new and expanded businesses.

• Make Collier County a more desirable destination.

• Increase housing values and the net worth of taxpayers.

• Provide improved health services by translating results of Jax-Florida's personalized medicine more quickly to local doctors and hospitals, improving their diagnostic and treatment alternatives.

Local residents may be able to participate in genome studies and genetic testing to benefit their health.

More businesses mean more people, more support businesses and greater conveniences (stores, restaurants, entertainment, higher quality of life).

Educational opportunities are expected to increase, including training opportunity by Jax-Florida.

Jax-Florida healthcare conferences will have a positive impact on hospitality services.

B) What are the risks to achieving the potential benefits?

The potential benefits of bringing Jax-Florida to Collier County are significant and could well be worth the expenditure of $130 million. However, there are also significant risks regarding whether these benefits would be realized.

• Would Jax-Florida succeed?

• Would Jax-Florida attract cluster companies to Collier County?

• Would the new companies expect money to relocate here?

• What are the lost opportunity costs and unintended consequences?

While the Productivity Committee can identify some of these risks, we are not able to quantify them. They should be taken into consideration when evaluating whether the potential benefits discussed earlier would actually be achieved.

C) Would Jax-Florida be successful?

1) Jackson Lab would be expanding its genome research and beginning a program of personalized medicine at Jax-Florida.

The Productivity Committee does not have the expertise to determine whether Jax-Florida would be successful in its genomic research and personalized medicine and, if it succeeds, how long it would take.

It could be a good investment to have a small group of consulting scientists evaluate the feasibility of the Jax-Florida genetic research and provide an impartial view of what it takes to start and maintain a biomedical cluster.

However, the committee can address some factors that could influence success. One thing is certain: Genetic research is a long-term effort and “success” would not be known for many years.

2) According to PricewaterhouseCoopers, the market for personalized medicine is already $232 billion and is projected to grow 11% annually to as much as $452 billion by 2015.

Personalized medicine targets individualized treatment and care based on personal genetic information. Genomic testing would enable physicians to:

• Identify an individual's susceptibility to disease

• Predict how a given patent will respond to a particular drug

• Eliminate unnecessary treatments

• Reduce incidence of adverse reactions to drugs

• Increase the efficacy of treatments

• Improve healthy outcomes.

Healthcare is a changing and growing market, and there is considerable potential for success in this area.

3) According to a New York Times article, “A Decade Later, Genetic Map Yields Few New Cures,” by Nicholas Wade (June 12, 2010), the “primary goal of the $3 billion Human Genome Project — to ferret out the genetic roots of common diseases like cancer and Alzheimer's and then generate treatments — remains largely elusive.”

However, “the new switch among geneticists to seeing rare variants as the major cause of common disease” is “a major paradigm shift in human genetics.” Rare genetic variants are discovered by sequencing an individual's genome, which is the direction planned by Jax-Florida's Institute for Personalized Medicine.

While there hasn't been huge success from genetics research so far, it looks promising in the future — highlighting the risk involved in this type of venture.

4) The Jax-Florida business plan was reviewed, and the committee met with Jackson Laboratory's Chief Operating Officer Chuck Hewett.

We examined the Statement of Operations and found that, over the 10-year period, the revenue for Jax-Florida would consist of:

• State funding of $130 million

• Local funding of $130 million

• Grants estimate of $63 million

• Service and collaborative revenue estimate of $71 million

• Donations estimate of $151 million

• Investment income estimate of $7 million

Total income estimate of $552 million.

During the first 10 years, state and local funding, accounting for nearly half (47%) of Jax-Florida revenues, would pay for capital costs as well as operating losses. After 2020, Jax-Florida would no longer have any state and local funding to subsidize annual costs.

Reviewing the financial plan by year, Jax-Florida experiences a net operating loss in years 2014 through 2022, which is reduced by philanthropic donations and investment income.

As can be seen above, financial viability depends heavily on Jax-Florida's effectiveness in fund raising, attracting grants and collaboration efforts.

While $10 million in donations are expected in 2013, 2014, 2015 and 2018, anticipated donations increase to $20 million in 2016 and $25 million in 2017. Failure to achieve these larger donations would result in negative cash flow balances at year-end in 2016 and 2017.

There is not much verifiable information in the business plan upon which to evaluate a $260 million funding decision, making the risk substantial.

At a minimum, to protect our $130 million investment, the county should own the facility and have liens on major items of equipment purchased with county funds. If not successful, remaining county funds would be returned.

Mr. Hewett appeared open to an arrangement with Collier County to share revenues (royalties) on patents to help recover county outlays.

The business plan provided to the committee does not include any milestones by which to evaluate Jax-Florida performance, other than annual employment objectives. There should be operational measures to determine success in obtaining research grants, donations, patents, licensing agreements, etc.

Reviewing the Jackson Laboratory 2009 audit for the year ending May 31, 2009, the committee noted that endowment investment losses were significant last year and asked whether Jax-Florida funds would be invested similarly.

Jackson Lab responded that the county's $130 million would be conservatively invested in money market and treasury investments. Private donations would be invested in a variety of funds that are much more conservatively structured than in 2008.

Conservative investments could affect an investment income level of $7 million over the 10-year period.

The state's funding for Jax-Florida is divided into $50 million in FY11, $40 million FY12 and $40 million in FY13.

The state's $50 million share is not yet available; $50 million is coming from the federal government to the state, which will then release state funds for Jax-Florida.

If the state does not provide the future $80 million, the economic viability of the project would be at risk. Jackson Lab has said the project cannot go forward without the state's funding in FY12 and FY13.

5) Jax-Florida competition with other genetic institutes.

Jax-Florida will have to compete for top genetic scientists as well as research grants and donations. There is significant competition for these resources in Florida alone.

Genome research work, some very similar to Jackson Lab, is being done in a variety of locations in the United States, several in Florida.

The Huffman Institute for Human Genomics in Miami is exploring genetic influences on human health,

Burnham Institute in Orlando is studying the fundamental molecular mechanisms of diseases and Torrey Pines Institute for Molecular Studies in Port St. Lucie is conducting biomedical research related to disease treatment.

The committee asked questions regarding how Jax-Florida would compete for top genome scientists with other Florida institutes, such as The Huffman Institute (Miami) and the Burnham Institute (Orlando), which are in major metropolitan areas that have a wide variety of activities and entertainments.

Jackson Lab said: To attract the best, we will offer attractive financial packages, the opportunity to create a new initiative and the opportunity to hire people they want to work with . . . Our project offers the quality of life and community values of Collier County, the reputation of The Jackson Laboratory, an opportunity to work on the most exciting biomedical science today, and the opportunity to create a new institute.

Asked about Collier County's ability to compete with major Florida metropolitan areas in offering spousal-career employment, Mr. Hewett said that scientists were frequently part of a two-career couple and that spouse employment, which was very important, represented a challenge.

He suggested that NCH, Physician's Regional and Lee Memorial hospitals could provide opportunities, as well as the biotech park in Fort Myers. Ultimately some of the cluster organizations would also offer opportunities.

Jax-Florida, located 30 miles from the Gulf Coast and city of Naples, in a small county of just over 300,000 people, with limited spousal-career opportunities, would have serious competition from major metropolitan areas offering similar genetic research opportunities.

6) Cluster organizations that are needed to ensure Jax-Florida's success.

Mr. Hewett discussed the human focus of the personalized medicine institute where they plan to work on neuro-degenerative disease, cancer and diabetes and they expect to be online within one to two years after building construction is completed (2014/2015).

Jax-Florida wants to collaborate first with a 50-bed specialty hospital, that would become a general and teaching hospital over the decade. It wants to conduct clinical trials, patient rounds and medical doctor participation in research.

Second, it would anticipate a medical-school department to work in conjunction with the specialty hospital.

Third, it expects a biotechnology park to develop with biomedical research companies that would benefit from Jax-Florida research in sequencing and apply that science. Retail development would follow.

It also expects a charter school and university with a B.S. program.

The committee expressed concern that the research support organizations that Jax-Florida needs to be successful do not currently exist in Collier County, while they are available in many biomedical hubs in other cities.

For example, the Huffman Institute and the Burnham Institute are co-located with medical schools. Burnham indicated it would not have come to Orlando without a local medical school.

A Burnham director said: “Absolutely critical for our success is proximity to medical schools and universities.” They are co-located with two hospitals (VA and Nemours), a new University of Central Florida medical school and a University of Florida research program going into the Medical City outside of Orlando.

While Burnham was not the initial catalyst for the Medical City, it, along with the VA and medical school, helped draw the Nemours hospital and University of Florida research program.

It was just announced today that the University of South Florida, a biomedical research university, plans to partner with Jax-Florida, including a presence at Ave Maria.

Mr. Hewett told Jeff Lytle: “It would not make any sense to come to Collier County where there is no research infrastructure, no research hospitals, no medical school, unless we could envision a future where those would start to come together . . . We need to attract a good medical school with a research and clinical focus.”

Mr. Hewett was asked why Jackson Lab chose to expand in Collier County rather than in another location that already had the hospitals, medical school and other organizations essential to the success of Jax-Florida. His response was that Collier County had asked them to come.

The state and county's willingness to provide $260 million to stimulate and diversify Collier County, and a loyalty by Jackson Lab to try to make the project work, are not necessarily the formula for a good business decision.

The absence of these essential support research organizations adds significantly to the risk of success. There would be less risk if agreements were in hand for a hospital and medical school to co-locate with Jax-Florida before making a $130 million funding decision.

D) Would Jackson Lab successfully anchor a biomedical complex, attracting related businesses to Collier County?

1) The major economic benefit to Collier County comes from the total number of businesses that are expected to cluster around a successful Jax-Florida and be successful themselves.

As mentioned earlier, the WEG report predicted more than 11,000 jobs and more than $10 billion in economic impact over a 20-year period.

However, without the cluster of new businesses (a geographic concentration of interconnected companies and institutions in a particular field), the predicted economic benefits would not accrue.

2) The Florida Office of Program Policy Analysis and Government Accountability (OPPAGA) report #10-05, dated January 2010, evaluated the seven publicly funded medical research ventures (grantees) in Florida and found that the biotechnology clusters were developing slowly. The report speculated that significant cluster growth would take decades.

Unfortunately, it was too early in the process, only two or three years after funding for each institute was provided, to determine success or failure. The depressed economy of the last few years would also have had an impact.

The report found that “relatively few biotech companies have begun operations in Florida since the grantees were established.”

Most grantees were in operation only two years or less, and the four approved in 2008 were in temporary facilities. “Experts in biotech industry agree that significant cluster growth often takes decades.” “This investment has not yet resulted in the growth of technology clusters.”

3) The State Science and Technology Institute (SSTI) prepared “A Resource Guide for Technology-based Economic Development,” dated August 2006. This report states that major research universities are the anchors for fast-growing technology-oriented economies, interacting with a robust technology-oriented private sector.

SSTI Guide stated that:

• Research conducted at universities generates new knowledge and technology that form the basis for creating new firms and new products.

• Universities attract and produce highly trained personnel who provide the technically educated work force. The presence of the work force attracts the technology companies to locate in proximity to the universities.

• Universities generate intellectual property that can lead to new products and processes and the creation of new companies.

According to this guide, the chance for success would be vastly improved if a research university would agree to co-locate with Jax-Florida in the near future.

4) The Washington Economics Group (WEG) report on the Economic Impacts in Collier County from Jax-Florida was reviewed by the Productivity Committee.

The Collier County Economic Development Council (EDC) provided the building square footage estimates for cluster companies, based on what the 700 available acres would hold. These estimates were then used to determine employment and economic impacts. The EDC estimated the cluster would include:

• 3,000,000 square feet used for research and development

• 750,000 square feet for a teaching hospital and education campus

• 20,000 square feet for goods and services

• 8,000 square feet for local government services

• 780 residential units

The WEG model takes the square footage estimates and translates them into jobs and subsequent economic impacts.

However, the square footage assumptions appear greatly overstated compared to the cluster complex envisioned by Mr. Hewett (paragraph C6).

The teaching hospital and education campus (750,000 square feet) would meet all the needs described by Mr. Hewett, leaving the remaining 2.8 million square feet to be filled with biomedical research and pharmaceutical companies wanting to co-locate with Jax-Florida.

The 2.8 million square feet of building space equates to 33 county administration building (Building F with 8 stories). Using the four-story height limit at Ave Maria, that translates to 66 four-story buildings for research and development companies, which is hard to imagine. When pushed to identify businesses that could occupy those buildings, WEG could only suggest pharmaceutical companies and suppliers of high-tech equipment.

The 750,000 square foot allocation for the hospital and education campus also needs to be examined. The North Collier Hospital, with more than 100 beds, occupies only 120,000 square feet. If the future hospital in Ave Maria were eventually of a similar size, there would be more than 600,000 square feet remaining for education.

WEG uses a multiplier based on national experience that may or may not be applicable to Collier County. However, to the extent square footage assumptions are too high, the economic impact calculations are overstated.

The WEG analysis assumed a linear build-out over 20 years producing an average increase of 360 direct employees at the Ave Maria site each year with an additional 160 indirect and induced employees each year.

It is difficult, some would say impossible, to accept that constant level of hiring, based on Mr. Hewett's stated expectations.

Another problem with the report is that it calculates only the “gross” economic benefit - not the “net” economic benefit.

WEG calculates the jobs and economic impact of spending $130 million for Jax-Florida.

WEG does not consider that $130 million, if not collected in taxes and used for Jax-Florida, would be spent in the local economy, by individuals, generating jobs and producing a different, but significant, economic impact.

The real, “net” economic impact of funding Jax-Florida is the difference between those two economic impacts. And this “net” impact would be substantially less than the “gross” WEG projections. This issue is covered under Opportunity Costs (paragraph F4).

It should be noted that, from a land-use perspective, the planned intense use of 700 acres at Ave Maria is not currently permitted. Significant changes to the Development of Regional Impact (DRI) would be required, subject to the local community's input/approval. This uncertainty adds to the risk.

5) The WEG report also calculated the overall rate of return on the county's $130 million investment, based on net sales tax and net operating revenues back to the county.

At estimated build-out in 2032, the return was projected to be 2.6%.

If a bonding alternative were selected, the return rate on the total $216 million investment (principle and interest) would be 1.6%

The return rate calculation does not include any measure of risk, which is significant compared to the small rate of return.

WEG estimated that, after 23 years, the $130 million county match would only generate $74 million in revenues returned to the county.

The calculations are based on theoretical multipliers, which fail to include the costs of growth. The model includes the positive economic impacts, but it does not include the costs to taxpayers.

In a related issue, the financial return to taxpayers, for their $130 million (or $216 million if bonded), could be limited in the future by an Innovation Zone designation and Tax Increment Funding.

If this cluster area was eventually designated an Innovation Zone and Tax Increment Funding (TIF) established, taxes from increased property values in the Zone could be put in an Economic Development Trust Fund to support area improvements in that Zone as well as in other Innovation Zones.

The increasing property taxes (or some portion thereof), due to increased property values, would not come back to the general fund to benefit taxpayers.

If the $130 million local match is provided by county taxpayers, the board of county commissioners should make a commitment that, if the Jax-Florida biomedical research complex was designated an Innovation Zone, the Tax Incremental Funding provision would not be used and future increased property taxes revenues would go to the general fund, benefiting those who paid $130 million for the Jax-Florida.

6) There has been no outside financial support for the Jax-Florida project so far. Outside financial interest would appear to be an indicator of success in establishing a biomedical cluster.

Other Innovation Incentive projects in Florida generated donors wanting to help attract the biomedical institutes with contributions to the county's local match.

The Huffman Institute came to Miami with $100 million in donations (meeting the full county match) from the Miller School of Medicine at the University of Miami where the institute co-located.

The Burnham Institute came to Orlando with city and county taxpayers funding $74 million of the $155 million local match. Private, hospital, developer and Disney donations made up the rest of the local match.

While there are many letters of support for Jax-Florida, there have been no commitments of money toward the county's $130 million local match.

There has been nothing from Lee County, where Jax-Florida would have a major spillover effects in new jobs, businesses and economic impact.

There has been no money from the hospitals and universities that want to work with Jax-Florida.

There has been nothing, but the value of 50 acres, from Barron Collier Companies, while it stands to benefit greatly from the development of 700 acres of its property at Ave Maria. It is donating $10 million directly to Jax-Florida, but that money would not be applied against the county's local match. It should make a substantial donation to the local match and other contributions to the county, such as a large parcel of land within Ave Maria.

The lack of outside financial support contributes to the level of risk.

At this point, the 316,000 residents of Collier County would be responsible for the full $130 million, less the value of the land donation. Every effort should be made to generate outside financial support to contribute toward the county's local match.

E) Would other companies/businesses expect money to cluster here?

1) Some companies, clustering with a biomedical anchor under the Florida Innovation Incentive program, required taxpayer money themselves.

Scripps came to Jupiter in 2004 at a cost of $570 million (state funding and local Palm Beach match). In 2008, Max Plank came to Jupiter with $94 million in state funding and an additional $93 million local match from Palm Beach County.

Torrey Pines Institute for Molecular Studies came to Port St. Lucie in 2006 with $24.7 million in state funding and a local match of $71.5 million. Two years later, the Vaccine and Gene Therapy Institute came to Port St. Lucie with $60 million in state funding and an additional $60 million local match was required.

SRI International came to St. Petersburg/Pinellas in 2006 with $20 million in state funding and a local match of a least $30 million. Two years later, Charley Stark Draper Laboratory came to St. Petersburg/Pinellas and Tampa/Hillsborough with $15 million in state funding and an additional $15 million local match was required.

2) In an interview with Jeff Lytle, Mr. Hewett said he's “unsure whether the county's finance plan would leave any money to attract other biomedical employers.”

In response to a Productivity Committee question, Jackson Lab said: “Some other non-profits may need public funding in order to locate or move to Collier County . . . we expect that most organizations will not.”

3) The decision to fund Jax-Florida should be made with the full recognition that additional county funding could be required for other businesses locating here.

Conceivably, a new business, important to the success of the Jax-Florida biomedical complex, could want to come to Collier County, but it would require Innovation Incentive funding — from the state with a local match.

Potential funding sources for additional local matches should be considered prior to the decision to fund $130 million for Jax-Florida.

F) What are the lost opportunity costs and unintended consequences of spending $130 million on Jax-Florida?

1) Opportunity cost is the cost we pay when we give up something to get something else.

If Collier County spends $130 million for Jax-Florida, that is $130 million of taxpayer money that is not available for other economic development purposes.

There could be other alternatives (or combinations of alternatives) that would produce significant benefits to Collier County — diversification and stabilization, new jobs contributing to a robust economy — at substantially less cost.

$130 million is a lot of money. With the state's $130 million, a total of $260 million would be spent for one economic development project that has substantial risk.

Local businesses have come forward looking for Collier County financial support.

Arthrex is considering a plan for an accelerated healing institute in Collier County and, at one point, was looking for county subsidies.

Another medical-related institute was interested in coming to Collier County, needing county subsidies.

Money spent on Jax-Florida would not be available to support these potentially desirable businesses.

Or additional county funding would be required. At some point, the county's ability to pay for additional economic development incentives will be exhausted.

2) The first objective of county government is to provide services to its residents.

Funding Jax-Florida could make it more difficult to fund other county operations without additional millage increases. Or, without millage increases, county services could be reduced below the levels generally expected by Collier County residents.

The county budget has been greatly reduced from prior years and the capital program has almost been eliminated. These programs will eventually need to be restored and cost (wage) increases, which have been suppressed, will occur in the future.

To put the magnitude of the Jax-Florida financial commitment in perspective, $130 million is about the size of the sheriff's budget; $260 million could reduce the county debt by one-third.

While the projected economic impact of Jax-Florida would spur development, the WEG report has shown that the county will not recover its $130 million through taxes and fees, even after 23 years.

Many of the planned cluster businesses will not pay taxes and the existing commercial and housing inventory will delay new construction and the associated increases in property tax revenue.

The existing inventory of housing in Collier County (excluding Marco), is 8,845 units plus a couple of thousand in shadow inventory held by the banks but not on the market. Lee County's housing inventory would be even greater than ours.

These new people and businesses will create additional demand for county services, while property tax revenues may be slow to increase.

3) While opportunity cost is the cost we pay when we give up something to get something else, Collier County residents may not want “to give up something.”

Under any financing alternative, county residents will have to pay hundreds of dollars to make up the $130 million (or $216 million with bonding).

Do they want to make that financial commitment?

4) The committee considered opportunity cost when reviewing the WEG report.

The WEG analysis gave the gross economic impact of spending $130 million of local money on Jax-Florida. But it didn't consider that if Collier County residents were not taxed to provide $130 million, they would spend some/most of that money creating jobs, earnings and economic impact in the local economy.

“Gross” impact minus alternative use impact would equal the “net” impact. This is the actual economic impact of spending $130 million for Jax-Florida.

If bonding were used, $216 million would be used for Jax-Florida to generate the same jobs and economic impact in the WEG report.

But $216 million spent in the local economy, by individuals over 20 or 25 years, would have a substantially greater impact than $130 million spent over that period.

This would make the “net” economic impact from spending on Jax-Florida even less. Unfortunately, these alternatives can't be quantified using the WEG model, unless the specific use for the money is known.

5) There could be major unintended consequences of providing $130 million to Jax-Florida.

Local non-profit organizations and charities are concerned that large local donations for Jax-Florida would seriously reduce their level of donations and impair their ability to provide services to the community.

Collier County's interest in spending $130 million for Jax-Florida could change the expectations of businesses.

Other companies could demand substantial subsidies to come to Collier County, including other companies joining the Jax-Florida cluster.

Arthrex threatened to leave the county, saying other states were offering them $50 million to relocate.

It sets the bar very high if county taxpayers are required to offer large subsidies to bring companies to Collier County and then large subsidies to retain them.

A county with only 316,000 people cannot afford to pay large subsidies, over and over, for economic development.