The Ann Arbor bubble

BY KELLY FRASER
Daily Staff Writer
Published March 10, 2009

Just a few miles from downtown Ann Arbor, American bison roam near the M-14 entrance ramp, peacefully grazing in front of a sprawling office park.

ZACHARY MEISNER/Daily
ZACHARY MEISNER/Daily

These bison aren’t exactly wild. They live at the Domino’s Farms Petting Zoo. But the visual does encourage a certain notion of an urban city surrounded by frontier.

In many ways, Ann Arbor seems to be isolated. Sitting a comfortable 35-odd miles from Detroit, the city also enjoys some economic and geographic distance from the Motor City’s current woes.

At just below seven percent, Ann Arbor boasts one of the lowest unemployment rates in the state. In December 2008, the most recent regional statistics available from the Michigan Department of Energy, Labor and Economic Growth, the unemployment rate in Wayne County — where Detroit is located — was 11.7 percent. The unemployment rate in Oakland County, where much of metro Detroit’s upper crust reside, was 8.6 percent.

Washtenaw County’s rate was 6.9 percent, nearly four percentage points lower than the state average of 10.6 percent for the same month.

Last week, the DELEG announced that January’s statewide unemployment rate was 11.6 percent, the highest mark in 25 years.

While much of the Southeast Michigan region is married to the auto industry, the Ann Arbor economy is founded in generally dependable industries.

Seven of the city’s ten largest employers are in either the education or health care sector, according to statistics kept by to Ann Arbor SPARK, an organization that promotes economic development in the city. The city’s two top employers are far and away the University and the University Medical School, which employ approximately 16,000 and 12,000 people respectively, according to SPARK’s December data.

But as the country and the state sink deeper into recession, the notion of the “Ann Arbor bubble” has been put to the test. While the University and Health Care System may provide the city some stability, there is no escaping that Ann Arbor’s economy is both directly and indirectly linked to the economic health of the rest of the state.

AN IVORY TOWER'S PROTECTION

The University’s central role in the city’s prosperity is undeniable.

“I don’t think the University would be what it is without Ann Arbor, and I don’t think Ann Arbor would be the same without the University,” said Jesse Bernstein, president and CEO of the Ann Arbor Chamber of Commerce.

But when asked if the city was too dependent on the University, Bernstein answered with a confident “no.”

“There’s an automatic flow of commerce that’s been symbiotic and self-perpetuating,” he said.

The University functions in two key ways in the region’s economy. First, the University directly employs thousands and brings in a student population of more than 41,000 to the city.

The University provides a stable job base for the region, said Lou Glazer, president of Michigan Future, an Ann Arbor-based think tank that conducts research on Michigan’s transition to a knowledge-based economy. A knowledge-based economy is one that is centered on high-skill jobs like those in the technology sector rather than manufacturing.

“For Washtenaw County, it’s a huge employment safety net,” Glazer said.

But secondly — and perhaps more importantly, according to Glazer — universities generate spin-off industries, businesses and investments.

With this in mind, the University has recently formed new centers and partnerships with the city that are focused on encouraging offshoot start-ups, particularly in science and technology.

These organizations include MPowered Entrepreneurship, a joint venture between the Ross School of Business, the College of Engineering, which supports student entrepreneurs, and the University’s Office of Technology Transfer, which helps University faculty and students market their science and technology-related product ideas

According to a new national report released March 3 by the Land Policy Institute at Michigan State University, every new patent in a metro county leads on average to the creation of nearly 500 new jobs. In addition, it raises the county’s average income by approximately $3, said Yohannes Hailu, an associate director for land policy at the institute and co-author of the study.

If this statistic holds true for Ann Arbor, then University programs like the Tech Transfer Office could have a sizable impact in bolstering the city’s economy. In the 2008 fiscal year, the office had a hand in 13 new start-ups and 75 new patents, according to its annual report.

The key to Ann Arbor’s success isn’t solely the presence of a college because this reasoning fails to explain why Ann Arbor is seemingly more prosperous than its Michigan counterparts. In December the unemployment rate in East Lansing and Mount Pleasant was 8.6 and 7.1, respectively.

Ann Arborites and economists alike tend to point to some indefinite and elusive ‘X’ factor that “makes Ann Arbor Ann Arbor”, but they disagree about what that factor is.

The University’s renowned international reputation, the health care industry, quality of life, green space, proximity to Detroit and easy access to Detroit Metropolitan Airport are all named as important factors to Ann Arbor’s prosperity.

Glazer said it is the size of the University’s research operations and Ann Arbor’s central location in Southeast Michigan that distinguishes Ann Arbor from other college towns.

This combination is what gives the University more spin-off potential than other schools, he said, adding that if Ann Arbor was located a hundred miles north or south, the University would have a much smaller impact on economic development.

The University of Illinois at Urbana-Champaign, another flagship research school, is an example of academia’s irrelevance if the school isn’t in a prime location, Glazer said.

“The University of Illinois in Champaign has almost no effect because it’s out in the middle of a corn field,” he said.

Glazer said the University’s growth should be a top concern not only for the region but the entire state as it tries to move away from the auto manufacturing industry and toward a high-tech economy.

“Our belief is that the asset that the state has that can have the greatest impact on Michigan’s transition to a knowledge economy is the research universities, with the University of Michigan being the most important,” he said.

It was precisely the importance of Michigan’s research universities that University President Mary Sue Coleman tried to impress upon the Michigan House Appropriations Subcommittee on Higher Education during her testimony in Lansing last week.

Coleman appeared with Michigan State University President Lou Anna Simon and Wayne State University President Jay Noren to lobby for more state funding for higher education.

In her remarks, Coleman stressed the University’s recent efforts to encourage students and faculty to be entrepreneurs and start businesses in the private sector.

“We want to encourage and reward professors who move inventions and innovations into the marketplace,” Coleman said during her subcommittee testimony.

Together, the three presidents represent the University Research Corridor, an alliance formed in 2006 with the state’s three largest research universities with the goal of guiding Michigan toward a knowledge-based economy.

In its 2008 report, the URC credited the three schools with the creation of nearly 70,000 jobs in the state. The report also estimated that the URC was directly and indirectly responsible for $13.3 billion of the state’s economy in 2007. This figure includes both the earnings of people directly employed by a URC school and the earnings of URC alumni in the state in addition to state tax revenue from these earnings.

THE DAY THE BUBBLE NEARLY BURST

Although the University provides the region some comfort, the city is by no means immune to economic strife.

Margaret Dewar, a professor of urban and regional planning in the Ford School of Public Policy, said economic downturns tends to be more gradual in economies based in education and health care.

“We’re experiencing a recession, it is just not as extreme,” she said.

Announcements like the University Health System’s hiring freeze for all non-patient care jobs and layoffs at Borders Inc.’s Ann Arbor headquarters stand as examples of the recession’s eroding effect.

In the past month, the bookseller has announced it is cutting hundreds of jobs, including 92 corporate positions at its headquarters.

But the single biggest bubble-shattering blow to Ann Arbor came on Jan. 22, 2007, when pharmaceutical giant Pfizer, Inc., suddenly announced it was closing its research and development facility near North Campus.

The city lost 2,100 jobs that day.

“Nobody expected that to happen,” said Bernstein, adding that construction crews were in the middle of remodeling the facility on the day of the announcement.

Not only was Pfizer the city’s largest employer outside of the University, but it was also the city’s largest taxpayer (accounting for about five percent of its tax base) and one of the city’s largest charitable contributors.

At the time, Ann Arbor mayor John Hieftje was frank about the shock the plant’s closing gave the city.

“This is certainly a blow to the city, but it is not one from which we cannot recover,” he said at the press conference the day of the announcement.

Bernstein said that the bright side of Pfizer’s closing was that it mobilized the city to find a buyer for the property and new sources of tax revenue to fill the void.

For nearly two years, who would take over the 174-acre research complex was a topic of nervous speculation around the city until the University announced last December that it would purchase the Pfizer campus..

After the president of the Bill & Melinda Gates Foundation’s Global Health Program,

Tadataka Yamada, casually referenced the Pfizer labs in a presentation on global health last April, the buzz was that the Bill and Melinda Gates Foundation was eyeing the site. A local magazine, the Ann Arbor Observer, even reported that Bill Gates had been seen dining at a nearby greasy spoon.

But in the end, it was the University that shelled out $108 million and reinforced the school’s role as Ann Arbor’s economic security blanket.

The University plans to use the labs to expand life science research and create 2,000 new jobs over the next decade.

The deal is a trade-off for the city between the promise of new jobs and tax revenue.

The property is probably in more stable hands being owned by the University than if a private company had purchased the site, Bernstein said. But because the University doesn’t pay property taxes, the city won’t gain any tax revenue in the deal.

Bernstein said he is hopeful the city will eventually regain the lost opportunity for tax revenue through the new jobs and spin-off projects that life science research will bring to the city.

SHORING UP THE FUTURE

Ann Arbor seems to have all the right ingredients for building a knowledge economy based in science and technology research, but the catch is getting the hyper-educated young professionals the University turns out to stay in the state and in the city.

The “brain drain” question is one that Michigan researchers and policy makers have struggled with for years.

How important to the city’s economic future is it that this year, Ann Arbor was named the third-best “Walking City” by Prevention Magazine? Or the top “College Sports Town” by Forbes Magazine? Or the “Best Place to Raise Your Kids” by BusinessWeek Magazine?

More important than you might think.

According to the report released March 3 by the Land Policy Institute about attracting “knowledge workers” — highly educated professionals between 24 and 35 — urban environments and cultural attractions are crucial to new economic growth.

Bernstein agreed, saying that research increasingly shows that the “knowledge workers” demographic first chooses where to live based on quality of life and then finds a job in that city.

Quality of life factors could include everything from a city’s parks, schools, nightlife, art scene or even the number of gyms per capita.

Glazer cautioned that improving quality of life as an economic strategy is a relatively new approach to city planning, so more research needs to be done to understand which factors weigh heaviest on the minds of the coveted young professional demographic.

To him, though, one thing is clear..

“It sure ain’t the weather,” he said.

The current top destination for graduates from Michigan’s public universities is Chicago.

And it is large urban centers like Chicago that city planners now turn to for a model in cultivating an appealing environment for the 24-35 demographic.

In recent years, Ann Arbor officials have begun to warm to the idea of high-density development and developing the city’s urban core in hopes of luring in new businesses and investors.

Phrases like “walkability,” “sustainable growth” and “high-density development” are buzzwords at recent City Council and Downtown Development Authority meetings.

But Glazer said there is room for improvement on the city’s part.

“It’s still not at the right scale,” he said.

Ann Arbor is uniquely positioned to become an example for other cities on how to successfully transfer to a knowledge economy, said Hailu with the Land Policy Institute.

“The only thing that might be missing is the right investment,” he said.