Project Flying Eagle. Updated limited scope report

Transcription

1 Project Flying Eagle Updated limited scope report August 10, 2017

2 August 11, 2017 Mark R. Hogan Secretary and Chief Executive Officer Wisconsin Economic Development Corporation 201 West Washington Avenue Madison, WI RE: Updated Limited Scope Economic Impact Report Dear Mr. Hogan: This updated report is issued as of August 10, 2017 for the Wisconsin Economic Development Corporation (WEDC) and is based predominantly upon information provided within the updated Ernst and Young (EY) report prepared for the Sponsor of Project Flying Eagle and discussion with WEDC. Baker Tilly has elected in this updated analysis to modify the radius of the analysis base to align with the radius used in the first report to consider potential competitive influences on worker and vendor base rather than utilize the county as the assessment radius for the input in the econometric model. This change enables the assessment to put both segments of analysis at parity and is a reasonable adjustment in the view of the preparer. In addition, the report removes the footnote on tax reciprocity and applies reciprocity in the assumptions of benefit without regard to where workers may be sourced from. This is significant change in the report as a whole in that it 1) assume legislative and budget outcomes retain reciprocity in whole as a status quo and 2) layers this into both direct and primary indirect outcomes. As with any report of this nature, particularly when working with a project of this size and duration to reach maturity, projections of benefit involve complex assumptions and projections many of which are based on sponsor specific information. The data-set worked with in this update was limited primarily to changes in employment projected in the updated EY report which limits the scope of detail in the subsequent BT assumption base for its update. That being said, our work with WEDC and prior data appears to provide sufficient information along with the new data to present this update reflecting anticipated benefits to the State of Wisconsin given the change to the report as noted above. We appreciate the opportunity to support Wisconsin in its efforts to grow its economy and access to employment for residents. Sincerely, Baker Tilly Virchow Krause, LLP

3 Project Flying Eagle Reduced Scope Economic Impact Report Baker Tilly has been engaged to review the proposed 10.5 LCD Fabrication Facility known as Project Flying Eagle. This analysis is an update to a prior report which was based upon data produced from an economic analysis performed for the sponsor, data provided on methodologies by the report preparer and information and instruction from the client. The analysis and this update focus on the fabrication facility known as Project Flying Eagle. The update is predominantly based on data procured from the updated economic impact assessment prepared for the project sponsor and dated July 19, We have worked with data provided within the updated report, the information exchanged relative to methodologies in prior discussion and direct information and discussion with the Wisconsin Economic Development Corporation, the client. The initial and updated economic impact assessments developed by the sponsor s provider utilized the State of Wisconsin as a whole in generating its outcomes. We have modified this assumption base to align with areas of regional impact being directly assessed in the report a 200 mile area of assessment for construction activities and a 100 mile radius for operations activities. Project description The project is a 10.5 LCD liquid crystal module and final TV assembly plant with total anticipated initial capital expenditures of $10.76BB. Of this total expenditure $5.3BB is expected to come from imported equipment/ materials and was excluded from the prior report and is excluded here as well. The remaining $5.7BB includes $5,57BB in direct anticipated WI Construction spending, the remainder or $130MM is anticipated to be WI based manufactured equipment. The prior provider did not include this WI equipment manufacturer in a separate estimate of job creation and specifically excludes it from tax base and the NAICS code for this equipment is not known hindering additional analysis. This is excluded from our analysis as well. It should be noted that this level of spend, though a temporary one is likely to have some ripple effect and value to the State and this value though perhaps less material than the others noted within the report is not known at this time. Based on the updated information, construction jobs provided by Ernst and Young (EY) are 10,234 positions in construction trades annually. This is projected to be recurring employment over a 4 year period. In discussion with EY it was determined that all of the jobs reported were full time equivalents throughout their report. Based on this, we would interpret jobs to be of 1,820 hours per year unless otherwise noted (this is the base requirement for FTE standards). We utilize the Emsi Social Accounting Matrix for econometric modeling, industry assessments by region, wage comparisons, and other social accounting samplings. Emsi provides the initial job assessment and projects out the anticipated direct supply chain, indirect supply chain and then induced economic impacts in the area under review based on the inputs provided for the subject project. In this case the data supplied was the estimated number of direct employees, NAICS code related to the type of construction.

4 Supply chain impacts or what is commonly referred to as indirect impacts in aggregate are reflected at 4,213 FTE construction related positions. This compares to the positions reflected in the EY report as they report supply chain activity, however the secondary level of indirect impact is not imputed in IMPLAN therefore the EMSI outcomes are higher as they look at these extended values. A total of 10,240 induced construction affiliated are projected for a total of 24,867 FTE positions. Construction Direct Construction Direct Indirect Induced Baker Tilly 10,234* 4,213 10,420 Ernst and Young 10,234 1,737 4,235 *Assumes EY Job numbers reflect full-time equivalent positions Wage Indirect Wage Induced Wage Baker Tilly** $616,895,876 $60, ,896,544 $69,997 $502,653,804 $48,239 Ernst and Young* $2,441,000,000 $610,250,000** $59,630** *Assumed to be a 4 year total ** Presented as annual labor income $433,000,000 $108,250,000** $62,320** $735,000,000 $183,750,000** $43,388** Based on the data provided in the EY report it is anticipated that 100% of outcomes attributed to this economic activity will accrue to the State of Wisconsin. However, it seems prudent to review the regional attributes to understand if this estimate of 100% capture of the outcomes is likely to occur. In general, contracts of this size are typically bid on a very wide geographic basis given the competitive demand they have in the market. A review based on a 200-mile radius for establishments that perform industrial construction, general contracting, servicing indicated that there are over 375 such firms and 3% growth rate in job base, which is not evenly spread in the area. Looking only in counties where there are 10 or more firms in this construction niche, 7 counties rise as likely boasting the highest level of competition if the number of firms serving the industry can be taken as an indicator as follows: Cook, IL: 102; Du Page, IL: 23; Will, IL: 21; Kent, MI: 13; Waukesha, WI: 12; Lake, IN: 12; Lake, IL: 10. Additionally, looking at the job loss rate in this industry for the same radius, it is notable that MN and IA lead at 25 and 23% respectively in 2015 to 2016 job loss rate in the industry, with WI and Illinois coming in at 17% and 16% respectively. It is our understanding that the State of Wisconsin has provided a construction sales tax exemption to the sponsor of the project which is projected to save the Project roughly $150MM in materials tax expense. This incentive is anticipated to offset reductions in cost that many material providers may be able to offer in order to attract the business and to mitigate concerns with reductions in beneficial outcomes. That being noted, it is unlikely that 100% of the materials and labor will contract in state. However, with regard to labor, income taxes the State of WI has reciprocity agreements with the majority of the border states, therefore leakage of anticipated tax value is anticipated to be mitigated substantially. 4

5 In looking at materials providers the report reflects a 2% growth rate, again with substantial volatility throughout the 200 mile radius. Within this range there are 452 establishments providing services directed to this type of construction with the preponderance of these being in Illinois, followed with WI, then MI and IN. as noted below: County State Number of Establishments Cook Illinois 95 DuPage 35 Kane 16 Hamilton 16 Will 14 Lake 13 Scott 11 County State Number of Establishments Waukesha Wisconsin 37 Dane 17 Milwaukee 14 County State Number of Establishments Kent Michigan 13 County State Number of Establishments Allen Indiana 10 The information subset on workers provides the following insights on potential leakage based on a 100-mile assessment radius: County State Number of Establishments Number of Workers in 2016 Wage in 2016 Cook Illinois $109,636 DuPage $105,118 Will $ 71,288 Lake $ 79,749 County State Number of Establishments Number of Workers in 2016 Wage in 2016 Waukesha Wisconsin $104,390 Dane $101,762 Milwaukee 5 44 $ 99,833 County State Number of Establishments Number of Workers in 2016 Wage in 2016 Lake Indiana $ 95,567 It is very difficult to make a precise estimate of the percentage of construction and materials contract that is likely to be awarded to Wisconsin based companies without direct commitment from the company. However, on the basis of the above data it would appear that contracts for procurement of this size and for this duration are definitely more likely than not to include a significant portion of purchase from outside the state absent incentives. Given the noted incentive, however, it is anticipated that a conservative position would be provide for leakage in materials purchase at 15%-20%. It is also likely that the contracting pool will not be 100% WI based. However, given the income tax structures in place it is assumed that EY s assumption that the direct workers will pay WI tax should be retained. 5

6 Secondary levels of indirect impact (the vendors to the vendors) which are not insignificant on a project of this size [1,155 jobs with wages of $71.95MM per annum] along with induced outcomes are more difficult to assess. Much of this is based on where the vendor and the employee reside for the ripple effect of these outcomes. Given the assessment of vendor placement and recent job declines (which may be indicative of aggressive demand for contracts) a conservative estimate of this portion of volume would be in the range of 30%. Based on these understandings, primary indirect has been assessed at 85% allowing for 15% leakage and secondary indirect values have been assessed at 70% allowing for 30% leakage. In looking at the induced outcomes this secondary level of indirect leakage must be taken into account. However, perhaps of more import is that the project is over an extended 4 year period. Giving rise to whether or not construction workers will consider temporary relocation. Looking at the 5 nearest counties the rental rates with only one county reflecting a higher average rental rate than the other 4 at $1,000-$1,499 (Racine, WI); where all others reflect an average rental rate of $ (Milwaukee & Kenosha, WI and Kane and DeKalb, IL). All 5 counties reflect fairly high rent burden rates at a low of 40% in Racine to a high of 46% in DeKalb. Kenosha and Racine reflect the highest renter vacancy rates at 6.6% and 6.7% respectively; Milwaukee, Kane and DeKalb reflect fairly tight rental markets at 3.9%, 4.2% and 4.9% rental vacancies respectively. In general there appear to be enough rental units available across the region to accommodate the influx of construction workers during the period depending on the need for varying size and costs. Estimating where the induced effects will take place many variables. Conservatively, it appears likely that some component of the workforce will migrate to the area for the construction period either as direct workers or first state indirect, and some component of these workers are like to choose to live outside of Wisconsin s borders. Based on the number of units in the communities compared to those in WI and including a component of off-set on induced impacts based on secondary vendor values as noted above, a conservative estimate of induced impacts likely to accrue outside the state is projected at 35%. While this reduces the overall anticipated outcomes to the State it certainly does not reflect a project with little impact. Based on the anticipated expenditures in the Region and the general expectations reflected above it is possible that the State of Wisconsin could anticipate the following in Construction Term Economic Impacts: Construction Direct Indirect Induced Baker Tilly 10,234* 10,234 3,058 Primary 2,599 10,420 6,773 Baker Tilly 1,155 Secondary 808 Ernst and Young 10,234 1,737 Primary 4,235 * Assumes EY job numbers reflect full-time equivalent positions Construction Direct Indirect Induced Baker Tilly* $616.9MM $616.9MM 214MM Primary $182MM $503MM $327MM Baker Tilly $80.1MM Secondary $56MM Ernst and Young* *Annualized wages $2,441MM $610.3MM* $433MM $108.3MM* $735MM $183.8MM* 6

7 Operations The sponsor provided EY with specific information regarding the employment base indicating the number by type and wages to be paid for direct jobs. Updates to the new report reflect a job increase to 13,000 jobs at the Project site. Based on the earlier EY report the hourly employees are anticipated to work an additional 20% in overtime above the 2,080 hours noted above. All employees are anticipated to have access to a benefit plan equating to 33% in value of their base wage. Baker Tilly used an assessment range of 100 miles for operations and NAICS code Notably in this radius the two primary states with significant job loss in the sector are WI and IL with the rate of loss in the period at 48 to 51% respectively. Given the significantly high number of jobs being generated it is anticipated that job training programs will be utilized and that residents of both states are likely to be served with employment from the new plant. However, WI has a higher preponderance of existing housing and vacant housing base in the 5 county area at this time, and also has a higher rate of lower owner-cost homes in the area with average ownership costs at $1000-1,499 versus $1,500-$1,999 which may indicate that workers may be more inclined to settle in WI overtime should costs remain stable. Based on these indicators it would appear that conservative estimates for induced impacts would tend toward higher rates of outcome retainage in WI. Baker Tilly utilized a location and industry based projection deriving total aggregate indirect job growth of 1,957. This excludes the potential added co-locating employer proposing an added 400 jobs in the area. Access to public subsidies and/or other incentives such as additional vendor relationships could drive location choice or change decisions to expand and determine re-location in some instances. EY utilized an estimate of 33.3% of indirect/supplier purchases occurring in WI. Induced jobs are projected in the 100 mile radius at 16,100. Based on the data reviewed it was determined that the overall subset was significantly similar to that reviewed for the construction analysis, with the changes in the data not material enough to drive a change to the percentage modifications to the indirect primary and secondary leakage or to the induced leakage assumptions. Therefore we have applied 15% and 30% respectively to primary and secondary indirect projections and 35% to induced as the leakage projections in developing the conservative subsets. Said another way we have applied a capture rate of 85% in primary indirect, 70% in secondary indirect and 65% in induced outcomes, while retaining 100% in direct outcomes based on assumptions that tax values will derive 100% in favor of the State of Wisconsin. Operations Direct Operations Direct Indirect Induced Baker Tilly 13,000* 1,957 16,100 Ernst and Young 13,000 11,453 10,792 *Assumes EY Job numbers reflect full-time equivalent positions Wage Indirect Wage Induced Wage Baker Tilly $1,111,816,073* $85,524 $152,677,369 $78,016 $777,550,280 $48,295 Ernst and Young $956,000,000 $73,538 $643,000,000 $56,142 $469,000,000 $43,458 * calculated by EMSI based on area and Industry norms 7

8 Summary Overview Construction Baker Tilly Baker Tilly EY Analysis Full Analysis Conservative Analysis or or or Annualized Direct 10,234 $ ,234 $ ,234 $ 617 Aggregate indirect 1, , , Induced 4, , , Total 16,206 $ ,867 $ 1,414 20,415 $ 1,182 Total Tax Contribution * * * Sales & Excise Taxes $ 214 $ - ** $ - ** Individual Corporate Other States Taxes $ 345 $ 411 $ 330 Local taxes not included Operations Baker Tilly Baker Tilly EY Analysis Full Analysis Conservative Analysis or or or Direct 13,000 $ ,000 $ 1,112 13,000 $ 1,112 Aggregate indirect 11, , , Induced 10, , , Total 35,245 $ 2,068 31,057 $ 2,043 25,043 $ 1,740 Total Tax Contribution * * * Sales & Excise Taxes $ 47 $ 48 ** $ 40 ** Individual Corporate Other States Taxes $116 $187 $157 Local taxes not included Estimated State Taxes are based on the based on production and imports at the Indirect and Induced facilities and the projected Wisconsin State Personal Taxes (at 5.56%), incorporating benefits. It should be noted that Wisconsin has reciprocity agreements on Personal State Tax with Illinois, Indiana, Kentucky and Michigan. Information presented on Corporate Tax paid reflect solely projections on taxes for production and imports, real estate and excise taxes. * Four year total **Anticipated sales tax exemption is applied Based on our review of the updated EY report, and data aggregated to date regarding the region and the Project and information provided directly from the client it appears that based on the Projects projected employment during construction and operations that significant outcomes are anticipated to be achieved through direct, indirect and induced beneficial outcomes. The primary variance in benefit is most likely to be seen in indirect and induced outcomes, based on vendor location, decisions related to re-location or expansion and potential changes in employee household location overtime and the impact these changes will have on the region. 8

9 Assumptions and Limiting Conditions 1. The research was conducted July 6-July 8, and on August 9, 2017, and has not been updated by Baker Tilly since such date. 2. In the event that the client provided a prior and/or amended economic impact assessment, a specific comment or detail and correspondence, or supporting data relative to the project, the consultant has relied extensively upon such data in the formulation of all analyses. 3. All information contained in the report which others furnished was assumed to be true, correct, and reliable. A reasonable effort was made to verify such information, but the author assumes no responsibility for its accuracy. 4. The maps, and other exhibits in this report are solely for the purpose of assisting the reader in visualizing the project and discussions in the narratives. The author made no specific knowledge of exact location data and assumes no liability in connection with such matters. 5. An evaluation of the community impact for the subject project is made as of a certain day. Due to the principles of change and anticipation and market variation, the community impact assessment is only valid as of the date of this analysis. 6. Possession of the report, or a copy thereof, does not carry with it the right of publication, nor may it be reproduced in whole or in part, in any manner, by any person, without the prior written consent of the author. Neither all nor any part of the report, or copy thereof, shall be disseminated to the general public by the use of advertising, public relations, news, sales, or other media for public communication without the prior written consent and approval of the consultant. Nor shall the consultant, firm, or professional organizations of which the consultant is a member be identified without written consent of the consultant. 7. The author of this report is not required to give testimony or attendance in legal or other proceedings relative to this report or to the Subject unless satisfactory additional arrangements are made prior to the need for such services and the author agrees to appear in writing. 8. The opinions contained in this report are those of the author and no responsibility is accepted by the author for the results of actions taken by others based on information contained herein. 9. Acceptance of and/or use of this report constitutes acceptance of all assumptions and the above conditions. 9

10 About WEDC The Wisconsin Economic Development Corporation (WEDC) leads economic development efforts for the state by advancing and maximizing opportunities in Wisconsin for businesses, communities and people to thrive in a globally competitive environment. WEDC provides resources, operational support and financial assistance to companies, partners and communities in Wisconsin. WEDC achieves its mission through initiatives driven by five strategic pillars: business development; community and economic opportunity; strategic economic competitiveness; state brand management and promotion; and operational and fiscal excellence. Working with more than 600 regional and local partners, WEDC develops and delivers solutions representative of a highly responsive and coordinated economic development network. Visit InWisconsin.com to learn more. About Baker Tilly Baker Tilly Virchow Krause, LLP (Baker Tilly) is a nationally recognized, full-service accounting and advisory firm whose specialized professionals connect with clients and their businesses through refreshing candor and clear industry insight. With approximately 2,700 employees across the United States, Baker Tilly is ranked as one of the 15 largest accounting and advisory firms in the country. Headquartered in Chicago, Baker Tilly is an independent member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 141 countries, with 28,000 professionals. The combined worldwide revenue of independent member firms is $3.8 billion. Connect with us: bakertilly.com Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The information provided here is of a general nature and is not intended to address specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought Baker Tilly Virchow Krause, LLP