Impacts of CarePoint Health Operating and Capital Expenditures on the Economy of Hudson County and the State of New Jersey

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1 Impacts of CarePoint Health Operating and Capital Expenditures on the Economy of Hudson County and the State of New Jersey Submitted to: CarePoint Health February 2015 Joseph J. Seneca, Michael L. Lahr, Will Irving

2 Contents Executive Summary... i Introduction... 1 Methodology: Input-Output Analysis and the R/ECON Input-Output Model... 2 Economic Impacts of CarePoint Health s Annual Operating Expenditures... 3 Allocation of Operating Expenditures... 3 Results of the Analysis... 6 State Impacts... 6 Hudson County Impacts... 8 Impacts on Government Revenue...10 Economic Impacts of CarePoint Health s Capital Expenditures...12 Allocation of Capital Expenditures...12 Results of the Analysis...13 State Impacts...13 Hudson County Impacts...15 Impacts on Government Revenue...17 Appendix A: Per-Million-Dollar Impacts...19 Per-Million-Dollar Impacts of Operating Expenditures...19 Per-Million-Dollar Impacts of Capital Expenditures...20 Appendix B: Derivation of Local Property Tax Impacts...22 Appendix C: Input-Output Modeling and the R/ECON Input-Output Model...23

3 Executive Summary This report was commissioned by CarePoint Health ( CarePoint ) to gauge the economic impacts of the company s capital and operating expenditures in New Jersey and Hudson County. The report comprises two main components: An economic impact analysis of CarePoint s operating expenditures for the 12 months ending in August An economic impact analysis of CarePoint s estimated capital expenditures for the period The findings of the economic impact analysis demonstrate that CarePoint s annual expenditures on capital construction and equipment, and its ongoing operations generate significant economic benefits for Hudson County and the state, including the direct effects of the initial spending, and the ensuing indirect economic multiplier effects that follow. New Jersey Impacts The economic impacts for New Jersey of CarePoint s estimated annual in-state operating expenditures of $384 million include: 7,313 Direct and indirect jobs; $728.6 million in GDP; and $581.8 million in compensation $22.2 million in state government revenues $7.3 million in local government (county, municipal, school district) revenues outside Hudson County The economic impacts for New Jersey of CarePoint s aggregate capital expenditures of $112 million include: 854 direct and indirect job-years (one job lasting one year); $86.6 million in gross domestic product (GDP); $72.1 million in compensation; $3.3 million in state tax revenues; and $1.4 million in local government (county, municipal, school district) revenues outside Hudson County If the total capital impacts are distributed evenly over the four-year period of the capital expenditure, and the operating expenditures are maintained at a consistent level, i

4 over the period, the combined average annual economic impacts of both the operating and capital expenditures for the period would total: 7,527 job-years; $750 million in gross domestic product (GDP); $600 million in compensation; $23 million in state government revenues $7.7 million in local government (county, municipal, school district) revenues outside Hudson County Hudson County Impacts The economic impacts for Hudson County of CarePoint s estimated annual operating expenditures include: 5,358 direct and indirectly generated jobs; $548.1 million in gross domestic product (GDP); $443.8 million in compensation; $22.4 million in local government (county, municipal, school district) revenues in Hudson County The economic impacts for Hudson County of CarePoint s capital expenditures include: 427 direct and indirect job-years (one job lasting one year); $43.8 million in gross domestic product (GDP); $40.5 million in compensation; $2.1 million in local government revenues in Hudson County. If the total capital impacts are distributed evenly over the four-year period of the capital expenditure, and the operating expenditures are maintained at a consistent level, over the period, the combined average annual economic impacts for Hudson County of both the operating and capital expenditures for the period would total: 5,465 job-years; $559 million in gross domestic product (GDP); $454 million in compensation; and $23 million in local government (county, municipal, school district) revenues in Hudson County. ii

5 Impacts of CarePoint Health Operating and Capital Expenditures on the Economies of New Jersey and Hudson County Annual Economic Impacts of CarePoint Health Operating Expenditures New Jersey Total Hudson County Elsewhere in New Jersey Employment (jobs) 7,313 5,358 1,955 Gross Domestic Product ($ million) Compensation ($ million)* State Government Revenues ($ million) Local Government Revenues ($million) (County, Municipal, School District) Aggregate Economic Impacts of CarePoint Health Capital Expenditures, New Jersey Total Hudson County Elsewhere in New Jersey Employment (job-years) Gross Domestic Product ($ million) Compensation ($ million)* State Government Revenues ($million) Local Government Revenues ($million) (County, Municipal, School District) Combined Average Annual Impacts of CarePoint Expenditures, New Jersey Total Hudson County Elsewhere in New Jersey Employment (job-years) 7,527 5,465 2,062 Gross Domestic Product ($ million) Compensation ($ million)* State Government Revenues ($million) Local Government Revenues ($million) (County, Municipal, School District) *Note: Compensation is a component of GDP. iii

6 A Note on the Economic Impacts It is important to note that this is an economic impact analysis estimating the addition to economic activity jobs, income, output, and tax revenues that result from the operations and capital expenditures of CarePoint. This study does not measure the value of the significant health benefits that accrue to all those thousands of individuals and their families that receive medical services from CarePoint in a given year. The relief of pain and anxiety, the amelioration of disease, the reduction in premature mortality, and the improvement in the quality of life for patients serviced by CarePoint is, of course, the key goal of its medical services and an additional and vital measure of its full contributions to the social well-being of the citizens of New Jersey. iv

7 Introduction This report presents estimates of the economic impacts of CarePoint Health s operating and capital expenditures. CarePoint Health currently has eight operating units in Hudson County. These are: Hoboken University Medical Center Bayonne Medical Center Christ Hospital (Jersey City) A management services organization Jersey Health Alliance Garden State Healthcare Associates CarePoint Health Medical Group McCabe Ambulance Each year, CarePoint expends funds on such recurring costs as personnel; physician services; accounting, legal and administrative consulting services; equipment maintenance; medical devices and equipment; and other materials and services necessary for the ongoing day-to-day operations of its facilities. The economic impacts of these operating expenditures recur annually as long as the expenditures persist at a comparable level. At the same time, the company also makes capital outlays on construction and refurbishment, equipment, and other non-recurring, one-time expenditure items. The economic impacts of these capital expenditures are, symmetrically, non-recurring. That is, they occur as the expenditures are made and in the short term following cessation of the expenditures, but they do not recur on an annual basis. When made in New Jersey, both types of expenditures not only have direct impacts in the form of the jobs associated with these activities, but also have further multiplier effects that ripple through the state economy. This study measures these direct and indirect effects for both CarePoint Health s operating and capital expenditures. The report begins with an explanation of the methodology and economic model used to generate the economic impact estimates. This is followed by the analysis of the operating expenditure impacts, and finally the analysis of the capital expenditure impacts. Both sections include a description of the expenditure data provided by CarePoint and a review of the analytical results. 1

8 Methodology: Input-Output Analysis and the R/ECON Input-Output Model CarePoint s capital and operating expenditures can have significant economic impacts for both New Jersey and Hudson County. Expenditures on staffing, management and maintenance, materials and equipment, and various third-party services required for the ongoing operation and upgrading of CarePoint s facilities have both direct economic effects as those expenditures become incomes and revenues for workers and businesses, and subsequent indirect ripple or multiplier effects, as those workers and businesses, in turn, spend those dollars on other consumer goods, business operations and capital investments, which, in turn, become income for other workers and businesses. This income gets further spent, and so on. Economic input-output modeling focuses on the interrelationships of sales and purchases among sectors of the economy. This analytical method measures the effect of changes in expenditures in one industry on economic activity in all other industries, thus capturing both the direct and indirect impacts of any set of initial expenditures in the economy. The R/ECON Input-Output Model developed and maintained at Rutgers Center for Urban Policy Research is designed to measure these direct and indirect impacts for New Jersey. The R/ECON model consists of 383 individual sectors of the New Jersey and county economies, and measures the impacts of investments and expenditures in terms of employment, income, gross domestic product, and state and local tax revenues. It has been used to estimate the economic impacts of a wide array of projects and activities, including: Construction of major office buildings Manufacture of military technologies Upgrading of electric utility infrastructure Operations of the rental housing sector in New Jersey Operations of regulated utility companies Construction and operation of liquid natural gas terminals Government tax incentives A comprehensive description of input-output modeling and the R/ECON Input- Output Model are presented in Appendix C. 2

9 Economic Impacts of CarePoint Health s Annual Operating Expenditures Allocation of Operating Expenditures CarePoint Health provided Rutgers with data on its operating expenditures for the 12-month period ending in August Detailed data on payments for products and services from third-party vendors were provided in an itemized listing that included vendor names, locations, payment amounts, and bookkeeping classifications. Data on internal staffing levels, payroll and benefits were also provided. In addition to analysis of the economic impacts at the state level, the data on vendor location also allows impacts to be estimated at the county level. These results are included with the state-level results in the next section. CarePoint s operating expenditures for the 12-month period comprise: $268.5 million in salary supporting 3,571 full-time (equivalent) jobs. $41.3 million in benefits. $74 million in payments to vendors in NJ. $35.2 million in payments to vendors in Hudson County. Itemized non-personnel expenditures (i.e., payments to third parties) were first organized by geographic location, and those expenditures paid to vendors outside the state were excluded from the analysis. In total, of $149.1 million in non-personnel expenditures, $74 million were allocated to New Jersey vendors, with $35.2 million of that total allocated to vendors located in Hudson County. These expenditures were then classified into industry sectors for use in the R/ECON Model, based on CarePoint bookkeeping classifications and/or information about the vendors primary business field. 1 In all, instate non-personnel expenditures were allocated across 54 industry sectors, as well as to state and local government entities and payments made to members of the board of directors. The distribution of these expenditures for the state and county is provided in table 1. Major expenditure categories include physicians offices ($16.6 million), management consulting 2 ($16 million), accounting and bookkeeping ($11 million), and wholesale equipment and supplies ($4.1 million). 1 The $74.03 million of in-state outlays were distributed across approximately 1,300 individual line item expenditures. Approximately 99% of the expenditures were accounted for by approximately half of these line items, and these were explicitly allocated to 54 industry sectors in the R/ECON Model. Smaller expenditures associated with the remaining line items (approximately $808,000) were allocated across the same 54 industries and government entities in proportion to the explicit allocation of the other 99% of the expenditures. 2 The management consulting sector includes medical administration consulting. 3

10 Table 1: Non-Personnel Operating Expenditures (sorted by NJ expenditures) CarePoint Health, Non-Personnel Operating Expenditures, LTM August 2014 R/ECON NAICS R/ECON Sector Sector Name Hudson County New Jersey 621A Offices of physicians, dentists, and other health practitioners 12,427,839 16,625, Management consulting services 12,403,406 16,046, Accounting and bookkeeping services - 10,972, Wholesale trade 659,574 4,073, B Other ambulatory health care services 1,381,782 3,334,606 Local Government Taxes, Rents, License Fees, etc. 3,130,136 3,130, Power generation and supply - 2,606, Legal services 30,933 2,186, Employment services 272,384 2,043, Real estate 1,213,267 1,337, Hospitals - 1,331, Construction 63, , Advertising and related services - 784, A Telecommunications, not counting cable and other porgram - 753, Architectural and engineering services - 747, Warehousing and storage 368, ,656 State Government Taxes, Rents, License Fees, etc. 625, Water, sewage and other systems 211, , Investigation and security services 520, , Machinery and equipment rental and leasing - 417, A Nondepository credit intermediation and related activities 408, , Other Personal Services (Parking) 390, , A Grantmaking and giving and social advocacy organizations 328, , B Civic, social, professional and similar organizations 178, , Custom computer programming services - 300,071 Income Directors Payments 273, , Commercial machinery repair and maintenance 222, , Transit and ground passenger transportation 195, , Electronic equipment repair and maintenance 73, , Religious organizations 134, , Food services and drinking places 120, , Business support services - 152, Manifold business forms printing 2, , A Colleges, universities, and junior colleges 122, ,416 4A Retail trade 45, , Services to buildings and dwellings - 123, A0 418 All other miscellaneous professional and technical services - 123, A0 413 Environmental and other technical consulting services - 120, Natural gas distribution - 96, Insurance agencies, brokerages, and related - 77, Software publishers - 56, Petroleum refineries - 36, Elementary and secondary schools 25,236 25, B Other educational services - 24, Truck transportation 12,836 20, A 153 Plastic plumbing fixtures and all other plastics products 13,549 13, Museums, historical sites, zoos, and parks 5,047 5, A0 451 Automotive repair and maintenance, except car washes 4,008 4, Cable and other program distribution 4,266 4, Data processing, hosting, and related services - 4, Drycleaning and laundry services - 3, Waste management and remediation services - 3, Sign manufacturing - 2, A Social Assistance, except child day care services 1,438 1, Surgical and medical instrument manufacturing Computer systems design services Total 35,246,367 74,032,873 4

11 In addition to these expenditures, CarePoint provided payroll and benefits data for the 12-month period ending in August During that period, CarePoint s eight operating units in Hudson County were staffed by 3,751 full-time (equivalent) employees, with a total payroll of $268.5 million. 3 In addition, CarePoint provided approximately $41.3 million in benefit premiums (health insurance, disability, etc.). Of these, approximately $4.3 million were paid to state government insurance programs, $14.7 million to federal government insurance programs, and $22.25 million to private benefit providers. Table 2 CarePoint Personnel Expenditures 12-Month Period Ending in August 2014 Employment 3,571 jobs (FTE) Total payroll (wages/salaries) $268.5 million Federal govt. insurance $14.7 million State govt. insurance $4.3 million Private benefit providers $22.25 million 3 By definition, the direct employment and payroll expenditures are sited at the location where work is performed, and are thus included in the direct impacts for both New Jersey and Hudson County. The R/ECON Input-Output Model accounts for the fact that income associated with the jobs is not necessarily completely spent in the county. 5

12 Results of the Analysis State Impacts Table 3 provides the aggregate economic impacts in New Jersey of CarePoint s total operating expenditures for the 12-month period ending in August Table 3 Economic Impacts in New Jersey of CarePoint Health s Operating Expenditures Direct Indirect Total Employment 3,571 3,742 7,313 Gross Domestic Product ($ million) Compensation ($ million) In aggregate, CarePoint s operating expenditures and their multiplier effects are estimated to generate in New Jersey: Employment An estimated 7,313 total (direct and indirect) jobs are estimated to be supported annually by the nearly $384 million in total operating expenditures. In the case of operating expenditures, the supported direct and indirect employment is estimated to continue as long as annual outlays are maintained at a similar level and distribution (and taking into account wage growth over time). 7,313 jobs in New Jersey, supported annually Employment would be generated across a wide range of sectors, as the initial direct expenditures supporting jobs and business revenues in the healthcare and related sectors ripple through the broader economy, generating indirect employment in other industries such as retail, services, transportation, etc. 5 Table 4 provides the estimated sector distribution (job categories are from the U.S. Bureau of Labor Statistics) of the total employment generated by the in-state expenditures. 4 Economic impacts are also provided on a per-million-dollar-of-expenditure basis in Appendix A. 5 The broadly defined service sector includes professional and business services (e.g., management consulting, engineering, architecture, accounting, legal services, etc.), education and health services, leisure and hospitality services, the information sector, and other service industries. 6

13 Table 4 Distribution of Employment Impacts by Sector Sector Employment Natural Resources & Mining 25 Construction 20 Manufacturing 226 Transportation & Public Utilities 144 Wholesale Trade 56 Retail Trade 732 Financial Activities 467 Services* 5,643 Total 7,313 *Services include the direct healthcare jobs at CarePoint facilities, as well as third-party professional services and indirect employment generated in the information, leisure and hospitality and other sectors. Gross Domestic Product Total gross domestic product (GDP), a measure of the annual value of the new economic output generated in the state as a result of CarePoint s operating expenditures, is estimated at $728.6 million. $729 million in GDP annually Compensation Labor compensation represents the total wages, salaries and wage supplements (i.e., employer contributions to government and private pension funds and social insurance) paid for the direct and indirect jobs generated in New Jersey as a result of CarePoint s expenditures. CarePoint s operating expenditures are estimated to generate $581.8 million annually in compensation. $582 million in compensation annually 7

14 Hudson County Impacts In addition to the statewide economic impacts, the impacts for Hudson County were also estimated. The R/ECON Input-Output Model estimates these impacts, including local tax revenue, based on inter-industry and inter-regional interactions, as well as explicit information on the location of purchases,. These impacts represent the portion of the total statewide impacts that accrue within Hudson County. Table 5 provides the aggregate economic impacts in Hudson County of CarePoint s $345 million in operating expenditures in Hudson County for the 12-month period ending in August Table 5 Aggregate Economic Impacts in Hudson County of CarePoint Health s Operating Expenditures Direct Indirect Total Employment 3,571 1,787 5,358 Gross Domestic Product ($ million) Compensation ($ million) In aggregate, these expenditures and their multiplier effects are estimated to generate in New Jersey: Employment An estimated 5,358 total (direct and indirect) jobs are estimated to be supported annually in Hudson County by CarePoint s operating expenditures. In the case of operating expenditures, the supported direct and indirect employment is estimated to continue as long as annual outlays are maintained at a similar level and structure (and taking into account wage growth over time). 5,358 jobs in Hudson County, supported annually Table 6 provides the estimated sector distribution (job categories are from the U.S. Bureau of Labor Statistics) of the total employment supported in Hudson County. 8

15 Table 6 Distribution of Employment Impacts by Sector Sector Employment Natural Resources & Mining - Construction 6 Manufacturing 64 Transportation & Public Utilities 69 Wholesale Trade 16 Retail Trade 369 Financial Activities 271 Services* 4,563 Total 5,358 *Services include the direct healthcare jobs at CarePoint facilities, as well as third-party professional services and indirect employment generated in the information, leisure and hospitality and other sectors. Gross Domestic Product Total gross domestic product (GDP), a measure of the annual value of the new economic output generated in the state as a result of CarePoint s operating expenditures, is estimated at $548 million in Hudson County. $548 million in GDP annually in Hudson County Compensation Labor compensation represents the total wages, salaries and wage supplements (i.e., employer contributions to government and private pension funds and social insurance) paid for all direct and indirect jobs supported in Hudson County by CarePoint s annual operating expenditures. Total compensation is estimated at $443.8 million for Hudson County. $444 million in compensation annually 9

16 Impacts on Government Revenue In addition to impacts on employment, economic output and compensation, CarePoint s operating expenditures generate government revenues at the state and local levels in the form of indirectly generated taxes, as well as those direct taxes, fees and other direct payments to government reported by CarePoint. These government revenues are provided in table 7. Table 7 Government Revenue Impacts in New Jersey of CarePoint Health s Operating Expenditures Total ($ millions) State government 22.2 Hudson County local governments (county, municipal, school district) Other local governments in NJ (county, municipal, school district) State Government Revenues Estimated annual state revenues comprise the income taxes associated with the salaries paid to the workers in the direct and indirect jobs supported by the operating expenditures, the sales and corporation business taxes associated with the economic output generated by those expenditures, and direct tax and $22.2 million in state taxes and fees fee payments reported by CarePoint. In total, CarePoint s annual in-state operating expenditures are estimated to generate approximately $22.2 million in state tax revenues. 10

17 Local Government Revenues Estimated local government revenues include direct fee and tax payments reported by CarePoint, as well as property tax revenues that accrue to county and municipal governments and local school districts over time, as a result of improvements to existing property or construction of new property afforded by the personal and business incomes generated directly and indirectly by CarePoint s operating $7.3 million in local government revenues elsewhere in the state $22.4 million in local government revenues in Hudson County expenditures. These local annual government revenues are estimated at $22.4 million in Hudson County, and an additional $7.3 million elsewhere in the state. Unlike the other impacts, the increase in property tax revenues occurs over a considerably longer period (see Appendix B for additional detail). 11

18 Economic Impacts of CarePoint Health s Capital Expenditures Allocation of Capital Expenditures CarePoint Health provided Rutgers with data on its actual and projected capital expenditures for the years These expenditures are primarily devoted to construction and renovation of facilities, equipment purchases, and information technology. Unlike operating expenditure impacts, which recur on an annual basis as long as expenditure levels are maintained, capital expenditures are one-time expenditures with impacts occurring on a one-time basis as the expenditures are made. The allocation of capital expenditures across these categories is provided in table 8. Table 8 CarePoint Health Capital Expenditures by Type, Category Total Equipment 685,000 4,372, ,057,868 Facilities 19,723,286 58,528,968 17,783,333 1,833,333 97,868,921 IT 11,971,232 2,974, ,945,907 Total 32,379,518 65,876,510 17,783,333 1,833, ,872,696 As in the case of the operating expenditures, capital expenditures were allocated across a set of sectors in the R/ECON Input-Output Model. Because the majority of the capital outlays were made on facility construction, renovation and replacement, the majority of expenditures are allocated to the construction sector, with most material and equipment allocated to the wholesale sector. The total capital expenditures are therefore distributed across a much smaller set of business sectors than the operating expenditures. This distribution is provided in table 9. Table 9 CarePoint Health Capital Expenditures in New Jersey by NAICS Code, NAICS Sector Name Total Data processing, hosting, and related services 3,398, ,398, Software Publishers 393, , A Other computer related services, including facilities 1,453, , ,048, Construction 10,861,156 34,451,560 11,154,083 1,100,000 57,566, Wholesale trade 11,024,966 27,014,031 6,142, ,333 44,915, Architectural and engineering services 1,282,600 2,502,364 80,000-3,864,964 Total 28,413,318 64,562,889 17,376,916 1,833, ,186,457 12

19 Note that most expenditures are sited in New Jersey, with only selected IT expenditures assumed to be made directly to out-of-state vendors (i.e., rather than from instate wholesale distributors). Construction activity was sited in Hudson County, with the remaining capital expenditures allocated to the rest of the state. Results of the Analysis State Impacts Table 10 provides the aggregate economic impacts in New Jersey of CarePoint s total in-state capital expenditures of $112 million for the period Table 10 Aggregate Economic Impacts in New Jersey of CarePoint Health s Capital Expenditures, Direct Indirect Total Employment (job-years) Gross Domestic Product ($ million) Compensation ($ million) In aggregate, these expenditures and their multiplier effects are estimated to generate: Employment An estimated 854 total (direct and indirect) jobyears are estimated to be supported by the estimated $112 million in total capital expenditures in New Jersey over the four-year period. A job-year is equal to one job lasting one year. This measure is used for short-term expenditures that generate employment on a one-time, short-term basis. Employment would 854 job-years in New Jersey, supported annually be generated across a wide range of sectors, as the initial direct expenditures on construction and capital purchases ripple through the broader economy, generating indirect employment in other industries such as retail, services, 13

20 transportation, etc. 6 Table 11 provides the estimated sector distribution (job categories are from the U.S. Bureau of Labor Statistics) of the total employment generated by the $112 million of in-state capital expenditures. Table 11 Distribution of Employment Impacts by Sector Sector Employment Natural Resources & Mining 5 Construction 303 Manufacturing 60 Transportation & Public Utilities 28 Wholesale Trade 34 Retail Trade 83 Financial Activities 48 Services 293 Total 854 Gross Domestic Product Total gross domestic product (GDP), a measure of the value of the new economic output generated in the state as a result of the capital expenditures, is estimated at $86.6 million. $86.6 million in GDP over 4 years Compensation Labor compensation represents the total wages, salaries and wage supplements (i.e., employer contributions to government and private pension funds) paid for all direct and indirect jobs generated in New Jersey as a result of the expenditures made in New Jersey. CarePoint s capital expenditures in the state are estimated to generate $72 in compensation. $72.1 million in compensation over 4 years Note: The above impacts would continue if CarePoint s annual capital expenditures remained at the level for the following four years. 6 The broadly defined service sector includes professional and business services (e.g., management consulting, engineering, architecture, accounting, legal services, etc.), education and health services, leisure and hospitality services, the information sector, and other service industries. 14

21 Hudson County Impacts Table 12 provides the aggregate economic impacts in Hudson County of CarePoint s in-county capital expenditures of $57.6 million for the period As in the case of the operating impacts, these impacts represent the portion of the statewide impacts that accrue within Hudson County. Table 12 Aggregate Economic Impacts in Hudson County of CarePoint Health s Capital Expenditures, Direct Indirect Total Employment (job-years) Gross Domestic Product ($ million) Compensation ($ million) These expenditures and their multiplier effects are estimated to generate in Hudson County: Employment An estimated 427 total (direct and indirect) job-years are estimated to be supported by the estimated $57.6 million in total capital expenditures in Hudson County over the fouryear period. Employment would be generated across a wide range of sectors, as the initial direct expenditures on construction and capital purchases ripple through the broader 427 job-years in Hudson County economy, generating indirect employment in other industries such as retail, services, transportation, etc. 7 Table 13 provides the estimated sector distribution (job categories are from the U.S. Bureau of Labor Statistics) of the total employment generated in Hudson County. 7 The broadly defined service sector includes professional and business services (e.g., management consulting, engineering, architecture, accounting, legal services, etc.), education and health services, leisure and hospitality services, the information sector, and other service industries. 15

22 Table 13 Distribution of Employment Impacts by Sector Sector Employment Natural Resources & Mining 1 Construction 301 Manufacturing 13 Transportation & Public Utilities 12 Wholesale Trade 1 Retail Trade 18 Financial Activities 14 Services 67 Total 427 Gross Domestic Product Total gross domestic product (GDP), a measure of the value of the new economic output generated in Hudson County as a result of the capital expenditures, is estimated at $43.8 billion. $44 million in GDP over 4 years Compensation Labor compensation represents the total wages, salaries and wage supplements (i.e., employer contributions to government and private pension funds) paid for all direct and indirect jobs generated in Hudson County as a result of CarePoint s capital expenditures. CarePoint s capital expenditures are estimated to generate $40.5 million in compensation in Hudson County. $40.5 million in compensation over 4 years 16

23 Impacts on Government Revenue In addition to impacts on employment, economic output and compensation, CarePoint s capital expenditures generate government revenues at the state and local levels in the form of indirectly generated taxes. These government revenues are provided in table 14. Table 14 Aggregate Government Revenue Impacts in New Jersey of CarePoint Health s Capital Expenditures, Total ($ millions) State government 3.3 Hudson County local governments (county, municipal, school district) Other local governments in NJ (county, municipal, school district) State Revenues Estimated state tax revenues generated by CarePoint s capital expenditures comprise the income taxes associated with the salaries paid to the workers in the direct and indirect $3.3 million in state taxes over 4 years jobs supported by expenditures, as well as the sales and corporation business taxes associated with the economic output generated by those expenditures. In total, CarePoint s in-state capital expenditures for are estimated to generate approximately $3.3 million in state tax revenues. 17

24 Local Government Revenues Estimated local government revenues comprise property tax revenues that accrue to county, municipal and school district bodies, over time, as a result of improvements to existing or construction of new property afforded by the personal and business incomes generated directly and indirectly by CarePoint s capital $1.4 million in local government revenues elsewhere in the state $2.1 million in local government revenues in Hudson County expenditures. These local government revenues are estimated at $2.1 million in Hudson County, and an additional $1.4 million elsewhere in the state. Unlike the other impacts, the increase in property tax revenues occurs over a considerably longer period. 18

25 Appendix A: Per-Million-Dollar Impacts In accordance with standard practice, economic impacts per million dollars of expenditure are calculated on the base of the total operating and capital expenditures (i.e., including those made outside New Jersey and Hudson County), rather than only on the basis of in-state or in-county expenditures. In this way, the per-million dollar impacts reflect the return for New Jersey and Hudson County per unit of total expenditure by CarePoint. The relationship between spending and impacts is linear that is, for each million dollar increase or decrease in CarePoint s operating or capital expenditures, the estimated increase or decrease in economic impacts would be those presented in the following tables, assuming that the distribution of in-state expenditures is the same or similar to that of the expenditures on which the impact calculations are based. Per-Million-Dollar Impacts of Operating Expenditures Table A-1 presents the estimated impacts for New Jersey CarePoint s operations per $1 million dollars of expenditure. The total expenditures of approximately $459 million on which the per-million-dollar operating impacts are estimated include the $384 million of instate expenditures, to which an additional $75 million in payments to vendors outside the state is added. Table A-1 Per-Million-Dollar Economic Impacts in New Jersey of CarePoint Health Total Operating Expenditures Indicator Impact Employment (annual) 15.9 Gross Domestic Product $1,587,893 Compensation $1,267,978 Table A-2 presents the estimated impacts for Hudson County of CarePoint s operations per $1 million of expenditure. Table A-2 Per-Million-Dollar Economic Impacts in Hudson County of CarePoint Health Total Operating Expenditures Indicator Impact Employment (annual) 11.7 Gross Domestic Product $1,194,551 Compensation $967,280 19

26 Table A-3 presents the estimated government revenue impacts of CarePoint s operations per $1 million of expenditure. Table A-3 Per-Million-Dollar Economic Impacts in New Jersey of CarePoint Health Total Operating Expenditures Indicator Impact State government $48,306 Hudson County local governments (county, municipal, school district) Other local governments in NJ (county, municipal, school district) $48,825 $15,986 Per-Million-Dollar Impacts of Capital Expenditures Table A-4 presents the estimated economic impacts for New Jersey per $1 million of capital expenditures made by CarePoint for the period As with the operating expenditures, per-million-dollar impacts are based on CarePoint s total estimated capital expenditures for the 4-year period, including those paid to out of state vendors. The estimated total on which the per-million-dollar capital expenditure impacts are estimated is approximately $117.9 million. Table A-4 Per-Million-Dollar Economic Impacts in New Jersey of CarePoint Health Total Operating Expenditures Indicator Impact Employment (annual) 7.2 Gross Domestic Product $734,649 Compensation $611,720 Table A-5 presents the estimated impacts per $1 million dollars of capital expenditures for Hudson County. Table A-5 Per-Million-Dollar Economic Impacts in Hudson County of CarePoint Health Total Capital Expenditures Indicator Impact Employment (annual) 3.6 Gross Domestic Product $371,360 Compensation $343,458 20

27 Table A-6 presents the estimated government revenue impacts per $1 million of capital expenditures. Table A-6 Per-Million-Dollar Economic Impacts in New Jersey of CarePoint Health Total Capital Expenditures Indicator Impact State government $28,176 Hudson County local governments (county, municipal, school district) Other local governments in NJ (county, municipal, school district) $18,104 $11,459 21

28 Appendix B: Derivation of Local Property Tax Impacts The estimated local tax revenues for the state estimated in this analysis represent property tax revenues that accrue, over time, as a result of improvements to existing or construction of new property. This activity is afforded by the personal and business incomes generated directly and indirectly by the operating and capital expenditures. Local tax revenues result from the expenditures generated from the income for workers and revenues for business. 8 The personal incomes and business revenues are, in part, used to pay property taxes and to improve properties (both residential and commercial). Thus, households and businesses that benefit from the operating and capital expenditures acquire and/or improve residential and commercial properties or alternatively are able to pay rents that include associated property taxes. Historical New Jersey fiscal and economic data are used to measure the relationship between business revenues and the amount of commercial property tax revenues collected, and between household incomes and the amount of residential property tax revenues collected. 9 Given both household income and business revenues associated with CarePoint s expenditures, the R/ECON Input-Output Model invokes the known statistical relation of increases in local property tax revenues to both increases in household income and business revenues in order to estimate the addition to local tax revenues attributable to the expenditures. These revenues accrue over a considerable period of time as the improvements and additions to properties become embodied in the property tax base of local governments. 8 For businesses, the revenue increase is measured in terms of value-added, and it is the change in value added in the business sector that is the basis for the estimated change in property tax revenues. 9 For the entire state, approximately 76% of total local property tax revenues are attributable to residential property; with approximately 21% derived primarily from commercial and industrial property. 22

29 Appendix C: Input-Output Modeling and the R/ECON Input-Output Model This appendix discusses the history and application of input-output analysis and details the input-output model, called the R/ECON I-O model, developed by Rutgers University. This model offers significant advantages in detailing the total economic effects of an activity (such as historic rehabilitation and heritage tourism), including multiplier effects. Estimating Multipliers The fundamental issue determining the size of the multiplier effect is the openness of regional economies. Regions that are more open are those that import their required inputs from other regions. Imports can be thought of as substitutes for local production. Thus, the more a region depends on imported goods and services instead of its own production, the more economic activity leaks away from the local economy. Businessmen noted this phenomenon and formed local chambers of commerce with the explicit goal of stopping such leakage by instituting a buy local policy among their membership. In addition, during the 1970s, as an import invasion was under way, businessmen and union leaders announced a buy American policy in the hope of regaining ground lost to international economic competition. Therefore, one of the main goals of regional economic multiplier research has been to discover better ways to estimate the leakage of purchases out of a region or, relatedly, to determine the region s level of self-sufficiency. The earliest attempts to systematize the procedure for estimating multiplier effects used the economic base model, still in use in many econometric models today. This approach assumes that all economic activities in a region can be divided into two categories: basic activities that produce exclusively for export, and region-serving or local activities that produce strictly for internal regional consumption. Since this approach is simpler but similar to the approach used by regional input-output analysis, let us explain briefly how multiplier effects are estimated using the economic base approach. If we let x be export employment, l be local employment, and t be total employment, then For simplification, we create the ratio a as t = x + l a = l/t so that l = at then substituting into the first equation, we obtain t = x + at By bringing all of the terms with t to one side of the equation, we get 23

30 t - at = x or t (1-a) = x Solving for t, we get t = x/(1-a) Thus, if we know the amount of export-oriented employment, x, and the ratio of local to total employment, a, we can readily calculate total employment by applying the economic base multiplier, 1/(1-a), which is embedded in the above formula. Thus, if 40 percent of all regional employment is used to produce exports, the regional multiplier would be 2.5. The assumption behind this multiplier is that all remaining regional employment is required to support the export employment. Thus, the 2.5 can be decomposed into two parts the direct effect of the exports, which is always 1.0, and the indirect and induced effects, which is the remainder in this case 1.5. Hence, the multiplier can be read as telling us that for each export-oriented job another 1.5 jobs are needed to support it. This notion of the multiplier has been extended so that x is understood to represent an economic change demanded by an organization or institution outside of an economy socalled final demand. Such changes can be those effected by government, households, or even by an outside firm. Changes in the economy can therefore be calculated by a minor alteration in the multiplier formula: t = x/(1-a) The high level of industry aggregation and the rigidity of the economic assumptions that permit the application of the economic base multiplier have caused this approach to be subject to extensive criticism. Most of the discussion has focused on the estimation of the parameter a. Estimating this parameter requires that one be able to distinguish those parts of the economy that produce for local consumption from those that do not. Indeed, virtually all industries, even services, sell to customers both inside and outside the region. As a result, regional economists devised an approach by which to measure the degree to which each industry is involved in the nonbase activities of the region, better known as the industry s regional purchase coefficient (r). Thus, they expanded the above formulations by calculating for each i industry li = r idi and xi = ti - r idi given that di is the total regional demand for industry i s product. Given the above formulae and data on regional demands by industry, one can calculate an accurate traditional aggregate economic base parameter by the following: 24

31 a = l/t = li/ti Although accurate, this approach only facilitates the calculation of an aggregate multiplier for the entire region. That is, we cannot determine from this approach what the effects are on the various sectors of an economy. This is despite the fact that one must painstakingly calculate the regional demand as well as the degree to which each industry is involved in nonbase activity in the region. As a result, a different approach to multiplier estimation that takes advantage of detailed demand and trade data was developed. This approach is called input-output analysis. Regional Input-Output Analysis: A Brief History The basic framework for input-output analysis originated nearly 250 years ago when François Quesenay published Tableau Economique in Quesenay s tableau graphically and numerically portrayed the relationships between sales and purchases of the various industries of an economy. More than a century later, his description was adapted by Leon Walras, who advanced input-output modeling by providing a concise theoretical formulation of an economic system (including consumer purchases and the economic representation of technology ). It was not until the twentieth century, however, that economists advanced and tested Walras s work. Wassily Leontief greatly simplified Walras s theoretical formulation by applying the Nobel prize winning assumptions that both technology and trading patterns were fixed over time. These two assumptions meant that the pattern of flows among industries in an area could be considered stable. These assumptions permitted Walras s formulation to use data from a single time period, which generated a great reduction in data requirements. Although Leontief won the Nobel Prize in 1973, he first used his approach in 1936 when he developed a model of the 1919 and 1929 U.S. economies to estimate the effects of the end of World War I on national employment. Recognition of his work in terms of its wider acceptance and use meant development of a standardized procedure for compiling the requisite data (today s national economic census of industries) and enhanced capability for calculations (i.e., the computer). The federal government immediately recognized the importance of Leontief s development and has been publishing input-output tables of the U.S. economy since The most recently published tables are those for Other nations followed suit. Indeed, the United Nations maintains a bank of tables from most member nations with a uniform accounting scheme. 25

32 Framework Input-output modeling focuses on the interrelationships of sales and purchases among sectors of the economy. Input-output is best understood through its most basic form, the interindustry transactions table or matrix. In this table (see table C-1 for an example), the column industries are consuming sectors (or markets) and the row industries are producing sectors. The content of a matrix cell is the value of shipments that the row industry delivers to the column industry. Conversely, it is the value of shipments that the column industry receives from the row industry. Hence, the interindustry transactions table is a detailed accounting of the disposition of the value of shipments in an economy. Indeed, the detailed accounting of the interindustry transactions at the national level is performed not so much to facilitate calculation of national economic impacts as it is to back out an estimate of the nation s gross domestic product. Table C-1 Interindustry Transactions Matrix (Values) Agriculture Manufacturing Services Other Final Demand Total Output Agriculture $100 Manufacturing $200 Services $120 Other $225 Value Added Total Input For example, in table C-1, agriculture, as a producing industry sector, is depicted as selling $65 million of goods to manufacturing. Conversely, the table depicts that the manufacturing industry purchased $65 million of agricultural production. The sum across columns of the interindustry transaction matrix is called the intermediate outputs vector. The sum across rows is called the intermediate inputs vector. A single final demand column is also included in table C-1. Final demand, which is outside the square interindustry matrix, includes imports, exports, government purchases, changes in inventory, private investment, and sometimes household purchases. The value added row, which is also outside the square interindustry matrix, includes wages and salaries, profit-type income, interest, dividends, rents, royalties, capital consumption allowances, and taxes. It is called value added because it is the difference between the total value of the industry s production and the value of the goods and nonlabor services that it 26