Memorandum
City of Lawrence
City Manager’s Office
TO: Diane Stoddard, Assistant City Manager
CC: David Corliss, City Manager
FROM: Roger Zalneraitis, Economic Development Coordinator/Planner
DATE: November 5, 2009
RE: Cost-Benefit Analysis of West Lawrence Labs Acquisition
The West Lawrence Labs deal as outlined would result in an interest subsidy from the City and the County. This subsidy would be the difference between the interest payments on the General Obligation Bond (“GO Bond”) and the interest payments made by LDCBA. The LDCBA payments would be the rate of return on Idle Funds from the previous year plus 50 basis points.
Although an estimate, we believe that the 25 year interest rate on the GO Bond will be about 5.5% and the 25 year return rate on Idle Funds will be about 3.35%. This return rate is based on the return on Idle funds from late 2002 to mid-2008 (we excluded the data after September 2008 because the rate of return in this time period has been unusually low). By adding 50 basis points to this return rate, we estimate an interest payment from LDCBA averaging about 3.85% over 25 years. However, LDCBA will pay a fixed rate of only $25,000 for the first five years. This results in the subsidy from the City and County being larger in this time period.
Over the 25 years of the bond, staff estimates the interest rate subsidy to be about $928,000. This means that the City and the County will each pay about $464,000 of the outstanding interest on the GO Bond, or about $18,500 per year. There is an additional opportunity cost of about $26,000, or $13,000 to the City and County each. This opportunity cost is the interest that could have been earned each year if the local governing bodies had been able to invest their idle funds instead of applying them toward the subsidy. Since idle funds are expended by the end of the year, we assume that the subsidy is a one-time impact to the budget and not cumulative. In discounted—or current—dollars, this subsidy and opportunity cost is equal to about $563,000, or $281,000 each for the City and County.
Staff also estimates that, once fully leased, the West Lawrence Labs could employ as many as 40 additional employees earning, on average, $57,000 per year. This is based on current wages and space needs for people engaged in bioscience research in Douglas County (NAICS Code 5417- Scientific Research and Development Services). These employees would likely be added over a 4-5 year period. If West Lawrence Labs maintains an average wage and employment level similar to this over the remaining 20 years, the City will receive about $900,000 of net benefits and the County will receive a little over $640,000 of net benefits. In current dollars, this is equal to $425,000 for the City and $300,000 for the County. It should be noted that these benefits do not include the value of retaining Crititech employees in the community.
Including the subsidy reduces the City discounted net benefit to $145,000, and the County’s to $25,000. The discounted net cash flow the City and County together becomes positive in about 13 years.
The three biggest factors that can affect the benefits to the community are as follows:
1) The return on the idle funds is lower than projected. While the GO Bond payments are set, the interest payment from LDCBA can vary from year to year and cannot exceed 4.0%. If idle funds earnings are lower than anticipated, the subsidy payment will increase.
2) The number of new employees at the West Lawrence Labs differs from that projected. Quicker lease-up of vacant space or faster growth of occupants could increase employment, while the reverse could slow down employment.
3) The wages of the new employees at the West Lawrence Labs differs from that projected. The industries likely to use the space have seen rapid wage growth over the last several years, at about 5-6% annually. In the analysis, staff assumes that wage growth will slow. If wage growth continues at the same trend that it has over the last several years, benefits could be substantially higher.