June Samuel Addy. Ahmad Ijaz. and. UA ECONOMIC IMPACT CBER, UA ii

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2 June 2015 Samuel Addy and Ahmad Ijaz UA ECONOMIC IMPACT CBER, UA ii

3 ECONOMIC IMPACTS OF THE UNIVERSITY OF ALABAMA Samuel Addy June 2015 and HIGHLIGHTS Ahmad Ijaz For the academic year, economic and fiscal impacts of The University of Alabama (UA) on the State of Alabama were $2.5 billion, 12,132 jobs, and $111.5 million in income and sales taxes ($34.1 million state sales tax, $34.7 million state income tax, and $42.7 million local sales tax). Compared to $144.2 million state appropriation for the year, the $2.5 billion impact translates into a $17.06 impact for every $1 of state appropriation. The seven home football games had a total statewide impact of $180.7 million, an average of $25.8 million per game. The State of Alabama will realize a 17.0 percent annual rate of return on its $144.2 million fiscal year 2014 appropriation to the university because over their careers the UA graduating class will pay additional taxes of $885.3 million in state income and sales taxes and $376.6 million in local sales taxes than they would have without their UA degrees. Attending UA is also a very attractive investment for its graduates. The real annual return on investment (ROI) for the UA graduating class ranges from 8.6 percent to 10.3 percent depending on the degree attained compared to a high school graduate; marginal real annual ROIs ranges from 8.6 percent to 21.3 percent. The UA economic impacts on the three-county Tuscaloosa metro area were $1.7 billion, 11,333 jobs, and $33.5 million in local sales tax; the average impact per home football game was $18.5 million for a total of $129.8 million. In addition to its main high-skill high-earning workforce development focus, UA also provides many other public and private benefits through wide-ranging research, service, and outreach programs that contribute significantly to economic development of Alabama and the Tuscaloosa metro area. UA ECONOMIC IMPACT CBER, UA 1

4 INTRODUCTION This report presents economic and fiscal impacts of The University of Alabama (UA) on the State of Alabama and the three-county Tuscaloosa metro area for the academic year. Both expenditure and employment impacts are presented as well as return on investment (ROI) analyses of a UA education from public and private perspectives because state appropriations and tuition and other attendance costs can be considered as investments by the state and students, respectively. The results show that these are worthwhile investments and that UA had significant impacts on the state and metro area economies. The University s mission is to advance the intellectual and social condition of the people of Alabama through quality programs of teaching, research, and service. These programs are wide-ranging and enable the university to make significant contributions to economic development statewide that benefit communities, business, industry, government, and individuals. UA focuses on being a student-centered research university and an academic community that is united in its commitment to enhancing the quality of life for all Alabamians. The vision is to be the university of choice for the best and brightest state students and other students seeking exceptional educational opportunities. and contribute significantly in various ways to society. Higher incomes generate more tax revenues for the state and local (county and city) tax jurisdictions. The University employed 6,230 faculty and staff in the academic year and had additional student employment that we estimate to be an extra 1,807 UA faculty/staff equivalent. Total UA expenditures for the year was $1.251 billion and comprised University spending of $400.2 million on payroll and $434.6 million on purchases together with student spending of $416.8 million on off-campus housing, food, clothing, etc. UA Direct Expenditures Students $416,760,216 33% Payroll $400,168,780 32% UA delivers numerous benefits that have long-lasting impacts on the general public and its graduates. The University provides jobs, generates large tax revenues, promotes innovation, assists in business creation and growth, and facilitates economic development by making the region and state attractive for business and industry location and expansion. UA also improves workforce skills and the general quality of life in the Tuscaloosa metro area, the state, and the nation. Graduates learning abilities and intellectual growth are enhanced, enabling them to earn higher incomes Other $434,626,610 35% TOTAL $1,251,555,606 Visitors to the University also make additional expenditures that increase the UA spending impact. Football alone had a per home game visitor expenditure impact of about $18.5 million in the Tuscaloosa metro area and $25.8 million statewide. UA visitors include athletic event spectators, parents and relatives, other UA ECONOMIC IMPACT CBER, UA 2

5 INTRODUCTION institutions academic personnel, business representatives, media representatives, education officials, vendors, research sponsors, and candidates for faculty and staff positions. Visitors are drawn to activities such as conferences, seminars, lectures, sports events, honors day, commencement ceremonies, homecoming, band competitions, alumni weekends and reunions, and other educational programs. value-added, which is the contribution to gross domestic product (GDP) or the value of goods and services produced on a value-added basis. Earnings impacts are part of value-added and are the wages and salaries of the workers recognized by the employment impact. The fiscal impacts are conservative because they are derived from earnings impacts and focus only on income and sales taxes; examples of other fiscal impacts not reported here include property, corporate income, lodgings, utility, and car tags and fees. Not all of the earnings impact is taxable. Spending on sales taxable items constitute 42.4 percent of earnings and state taxable income is about 66 percent of earnings. Sales tax rates of 4.0 percent for state and 5.0 percent for local (combined county and city) jurisdictions are used. Combined county and city sales tax rates vary between 3.0 to 7.0 percent among the 67 Alabama counties, but are most frequently at 5.0 percent. Direct UA spending generates rounds of spending in the metro area and the state that are captured by multipliers from the Regional Input-Output Modeling System (RIMS II), which is an input-output model developed and maintained by the Bureau of Economic Analysis of the U.S. Department of Commerce. Multipliers are available for states, metro areas, counties, and county groupings. A model that uses RIMS II multipliers for Alabama and the Tuscaloosa metro area combined with state and region specific tax information was developed and used in this study. The economic impacts focus on output, value-added, earnings (wages and salaries), and employment. Output refers to total or gross business sales and contains The state income tax rate is 5.0 percent on net income. Actually, the first $500 and the next $2,500 are taxed at 2.0 percent and 4.0 percent, respectively, for filers who are single, heads of family, and married but filing separately. For married joint filers the first $1,000 and the next $5,000 are taxed at 2.0 percent and 4.0 percent, respectively. Excess net income is taxed at the 5.0 percent rate. State law in 2006 increased the individual income tax threshold by increasing the standard deduction for taxpayers with adjusted gross income of $30,000 or less and by increasing the dependent exemption for taxpayers with adjusted gross income of $100,000 or less. UA ECONOMIC IMPACT CBER, UA 3

6 UA ECONOMIC IMPACTS ON ALABAMA AND RETURN ON PUBLIC INVESTMENT With increasing enrollment and employment of faculty and staff, the university s impacts continue to rise to record levels. Of the total direct UA spending, about $1.1 billion is estimated to have been made in Alabama from 95 percent of payroll, 65 percent of purchases, and all student expenses (Table 1). In addition, there is a visitor impact of $257.3 million that comprises $188.9 million from athletics and $68.4 million from other visitor spending $180.7 million is from the seven home football games at about $25.8 million each. The economic and fiscal impacts of UA on the state for the academic year were $2.461 billion in output (including a $1.403 billion contribution to GDP), 12,132 jobs, and $111.5 million in income and sales taxes ($34.1 million state sales tax, $34.7 million state income tax, and $42.7 million local sales tax). The statewide economic and fiscal impacts are only part of what the State of Alabama gets in return for its appropriation to UA. Many public benefits of education are hard to measure innovation promotion, direct and indirect new business development and job creation, general improvements in quality of life, public service, etc. but others such as UA Economic Impact on Alabama SOURCE The University of Alabama Payroll Purchases Subtotal Student Spending Visitor Spending Total Contribution to GDP DIRECT SPENDING $400.2 $434.6 $834.8 $416.8 $1,251.6 SPENT IN ALABAMA $380.2 $281.4 $661.5 $416.8 $1,078.3 INDIRECT IMPACT $396.6 $293.5 $690.2 $434.8 $1,125.0 (Millions of dollars) TOTAL IMPACT $776.8 $574.9 $1,351.7 $851 $257.3 $2,460.6 $1,403.4 Employment Impact 12,132 Statewide Fiscal Impact State Sales Tax State Income Tax Local (City and County) Sales Tax $111.5 $34.1 $34.7 $42.7 * Rounding effects may be present Source: Center for Business and Economic Research, The University of Alabama UA ECONOMIC IMPACT CBER, UA 4

7 UA ECONOMIC IMPACTS ON ALABAMA AND RETURN ON PUBLIC INVESTMENT tax receipts noted previously. Thus, the state s net investment is $75.4 million if just state tax receipts are considered or $32.8 million if both state and local tax receipts are considered. The $1.262 billion additional taxes provide annual rates of return of 17.0 percent on a net investment of $75.4 million or 33.1 percent on a $32.8 million net investment. Focusing only on state tax receipts, the $885.3 million of receipts on a net investment of $75.4 million yield a 13.1 percent annual rate of return. These rates of return are conservative as there are additional tax and other government revenues that are not considered here (e.g., property taxes and vehicle registration and tag fees). additional tax receipts can be determined. From a public investment perspective, additional tax revenues can be considered as returns to state appropriation. To determine the return on this investment, we assume that 30 percent of the graduating class will reside permanently out of state and also that sales and income taxes stay at current rates. UA Economic Impact on Alabama Visitors $257,308,083 10% Payroll $776,781,624 32% Over the working life of the graduating class, the UA education will enable them to pay $1.262 billion additional Alabama income and sales taxes than they would have otherwise; $885.3 million in state only sales and income tax collections and $376.6 million local sales taxes. These additional tax collections yield annual rates of return on the state s investment that are better than stock market performance. The $144.2 million state appropriation for is offset in the same year by the statewide sales and income Students $416,760,216 33% EMPLOYMNENT IMPACT 12,132 Other $574,907,727 23% EXPENDITURE IMPACT $2.461 billion UA ECONOMIC IMPACT CBER, UA 5

8 UA ECONOMIC IMPACTS ON TUSCALOOSA METRO AREA UA Economic Impact on Tuscaloosa Visitors $184,767,593 11% Other $333,521,324 19% EMPLOYMNENT IMPACT 11,333 Payroll $508,234,359 29% Students $705,741,750 41% EXPENDITURE IMPACT $1.732 billion Of the total UA expenditure, we estimate that 75 percent of payroll, 45 percent of purchases, and all student expenditures were made in the metro area for a total of $869.4 million (Table 2). This resulted in an impact of $1.732 billion, including a visitor expenditure impact of $184.8 million that consists of about $135.7 million from athletics and $49.1 million from other visitor expenditures. The University also had an employment impact of 11,333 jobs for the metro area. Football provided a visitor expenditure impact of $129.8 million from the home games played in Tuscaloosa, with an average impact per game of about $18.5 million. Other athletics baseball, basketball, gymnastics, softball, swimming, etc. are conservatively estimated to have had a $5.9 million impact. About $33.5 million in local sales tax revenues for the metro area s counties and cities are generated. UA Economic Impact on Tuscaloosa SOURCE The University of Alabama Payroll Purchases Subtotal Student Expenditures Visitor Expenditures Total DIRECT SPENDING $400.2 $434.6 $834.8 $416.8 $1,251.6 SPENT IN METRO AREA $300.1 $197.0 $497.1 $416.8 $913.8 (Millions of dollars) INDIRECT TOTAL IMPACT IMPACT $208.1 $136.6 $344.7 $289.0 $633.7 $508.2 $333.5 $841.8 $705.7 $184.8 $1,732.3 Employment Impact 11,333 Local (city and County) Sales Tax $33.5 * Rounding effects may be present Source: Center for Business and Economic Research, The University of Alabama UA ECONOMIC IMPACT CBER, UA 6

9 EDUCATION AS PRIVATE INVESTMENT The University of Alabama education is also an investment by the students who enroll in UA degree programs. There are many benefits from getting a UA education including the fact that education is its own reward. The ability to learn and grow intellectually greatly increases graduates earning potential. However, a college degree comes at a cost that includes the obvious cost of the education (tuition, room and board, books, etc.), as well as forgone earnings while in school. UA Education as Private Investment Average Starting Salary Total Cost of Degree (2014)* Lifetime Earnings (2014) Incremental Income (2014) Real Annual Return on Invest. Real Return Relative to High School Lifetime Earnings (Current) Incremental Income (Current) HIGH SCHOOL $22,864 $1,241,067 $2,804,805 high school graduation as one reference and the prior degree level as a second reference. Half the opportunity cost is included in the marginal cost of the UA degree since many students work while pursuing their education. A category of people with some college is included in the study to capture individuals who began college but did not complete the bachelor s degree requirements. These individuals will earn more income in their (Class of 2014) SOME COLLEGE BACHELOR S MASTER S $28,076 $74,622 $1,609,827 $368, % 8.6% $3,565,632 $760,828 $37,608 $199,585 $2,148,219 $538, % 7.9% $4,540,975 $975,343 $58,493 $293,367 $3,142,478 $994, % 10.3% $6,382,418 $1,841,442 DOCTORATE $85,084 $465,368 $4,166,123 $1,023, % 9.8% $7,979,888 $1,597,471 * Total cost of degree is the direct cost of the education (tuition, room and board, books, ect.), as well as forgone earnings while in school. Source: Center for Business and Economic Research, The University of Alabama The forgone earnings, often called the opportunity cost, is taken to be the earnings potential of the educational level immediately below the graduate s highest degree. For example, the opportunity cost of getting a master s degree is the earnings potential of a bachelor s degree holder. The cost of study is therefore the opportunity cost plus the direct expenditure to obtain the degree. This cost is the actual marginal cost of pursuing the degree, which can be compared to the marginal benefit or addition to value (called value added) for the graduate, to determine whether the decision to obtain a UA degree is prudent. Value added is the difference in salaries of a particular degree graduate with that of a specified reference. Return on investment (ROI) is reported with working lives than high school graduates will without college experience; there are also students who enroll in, but do not complete, advanced degree programs. In the marginal analysis, the average doctoral degree salary is compared to that of the master s degree, a master s is compared to a bachelor s, a bachelor s to a high school graduate with some college experience, and some college to a high school graduate. Table 3 shows the results of the investment analysis with the assumption that graduates will retire at 67 years of age. The table also shows lifetime earnings in both current and real (year 2014) dollars. Expected UA ECONOMIC IMPACT CBER, UA 7

10 EDUCATION AS PRIVATE INVESTMENT Real Annual Rates of Return of UA Education by Degree CLASS OF % % Marginal Return Relative to High School 8.6% SOME COLLEGE 8.9% 7.9% BACHELOR S 21.3% 10.3% MASTER S 14.5% 9.8% DOCTORATE was determined by generating annual cost and income streams over the different working lifetimes of the categories being considered. People with some college will have real lifetime earnings of about $1.6 million, nearly $368,760 more than a high school graduate, which yields an 8.6 percent real annual ROI on their UA investment. Bachelor s and master s degree holders will earn marginal value added of $538,392 (an 8.9 percent ROI) and $994,259 (a 21.3 percent ROI), respectively. A doctorate will earn a little over $1.0 million more than a master s, yielding a 14.5 percent real annual ROI. Using high school graduation as a reference (i.e., attending UA instead of ending schooling at high school graduation), the master s yields the greatest real annual ROI with 10.3 percent, followed by 9.8 percent for the doctorate, 8.6 percent for some college, and 7.9 percent for the bachelor s. lifetime earnings increase from $2.8 million for a high school graduate to about $8.0 million for the doctoral degree; the corresponding real lifetime earnings range is $1.2 million to $4.2 million. The investment analysis was performed using real or constant year 2014 dollars. The real annual ROI for students with a UA education The positive real rates of return and their magnitude indicate that the decision to pursue a UA degree is very sensible. The doctoral degree has the second highest marginal return on investment, but earns the most even over the shorter working life. These real investment returns are better than the long term real returns on investment in U.S. equity markets. UA ECONOMIC IMPACT CBER, UA 8

11 CONCLUSIONS AND DISCUSSIONS The University of Alabama economic impacts on the State of Alabama were $2.461 billion, 12,132 jobs, and $111.5 million in tax receipts ($34.1 million state sales tax, $34.7 million state income tax, and $42.7 million local sales tax). The University is also an excellent investment opportunity for the state, yielding a 17.0 percent annual rate of return on its state appropriations. The economic impacts on the Tuscaloosa metro area are $1.732 billion and 11,333 jobs. University produces skilled and knowledgeable people; provides valuable research, adding to the stock of knowledge; enhances graduates ability to learn and grow intellectually and to contribute in various ways to society; facilitates economic development; and provides valuable service to Alabama and its counties and communities. Thus UA delivers tangible and intangible benefits to its graduates and the state economy; there are also benefits to the national economy that are not highlighted here. The UA education is a very high-yielding investment for students. The real annual ROI for some college attendance is 8.6 percent over a high school graduate. The bachelor s degree has a 7.9 percent real annual ROI over some college attendance, and the master s degree yields a 21.3 percent real annual ROI over a bachelor s degree. The doctorate provides a 14.5 percent real annual ROI over the master s and has the highest lifetime earnings. Any study of this kind has some uncertainties. The real rates of earnings growth may change. So can income and sales tax rates, rate of alumni residence in the state, etc. However, under the assumptions of this report, a UA education is a very sound investment for students (better than most stocks and stock indexes) and a better investment for the state than most stocks and bonds. There are several intangible benefits of a UA education that cannot be measured. The It is important to note that there is no economic development without education. Higher education, in particular, plays a real and critical role in the modern hightech economy. This is because economic growth is attributable mostly to the knowledge economy which is characterized by increasing returns, rather than the physical economy with its diminishing returns. Physical products depreciate and become obsolete. Knowledge builds on prior knowledge and does not depreciate or become obsolete. The physical products and services consumed in society are made better mainly with the gains in knowledge provided by higher education. This makes UA essential to the economic development of the metro area, the state, and the nation. The economic impacts of The University of Alabama on Alabama and the Tuscaloosa metro area certainly exceed by far those we have presented in this report. UA ECONOMIC IMPACT CBER, UA 9

12 ACKNOWLEDGEMENTS The staff of the Center for Business and Economic Research (CBER), Financial Affairs (FA), and the Office of Institutional Research and Assessment (OIRA) provided valuable assistance to the completion of this report. Especially helpful were Melissa Barnett, Milo Crabtree, Candace Holliday, April Nelson, Julie Shelton, and Kevin Stevens all of FA; Michael O Rear and Julianna Proctor of OIRA; and Anthony Bratina and Morgan Tatum of CBER. UA ECONOMIC IMPACT CBER, UA 10