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Maryland Comptroller to Seek Billion-Dollar Incentive Package for Life Sciences in 2008

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Concluding that Maryland must step up government support for the life sciences, state Comptroller Peter Franchot has vowed to pursue in the new year a multi-year package of subsidies and other programs expected to catapult the industry into the nation’s top tier of bioclusters.
 
Franchot told BioRegion News he will seek a life sciences measure comparable to the $1 billion, 10-year Life Sciences Initiative now under review by Massachusetts lawmakers.
 
“I could certainly envision supporting and defending a state strategy in that range,” Franchot said in an interview. “I would certainly encourage everyone involved at the policy level to think in the billion-dollar range because of the importance of the life sciences to the state’s economic development vision.”
 
He said Gov. Martin O’Malley has begun working with legislative leaders to boost state support for the life sciences: “They’ve got a package of tax incentives and other subsidies that they’re going to be proposing.”
 
But a spokesman for the state Department of Business and Economic Development, Dave Tillman, cautioned that O’Malley and legislative leaders won’t pursue such incentives until they receive a recommendation from the Life Sciences Advisory Board. The board is a 15-member panel appointed by O’Malley to develop a strategic plan for growing the industry in Maryland; its members include DBED Secretary David Edgerley.
 
Furthermore, it is uncertain whether Maryland lawmakers would approve the package due to constraints in the state’s finances (see sidebar, below).
 
Tillman referred additional questions to the advisory board’s chairman, Thomas Watkins, who through a spokesman did not return an e-mail message with written questions from BRN. Watkins is the president and CEO of Human Genome Sciences, a biopharmaceutical company based in Rockville, Md.
 
Franchot said the push for greater subsidies was a key result of the “Life Sciences Summit,” a daylong event held by his office earlier this month.
 
“The purpose of the life science summit was to bring together the business leaders of the state with the academic leaders, and also representatives of the public labs, and inventory the assets that Maryland has, and brand ourselves as the number-one state in the country for life sciences,” the comptroller said. “We’re not going to win every battle. But with this new image, we’re going to win more than we lose.”
 
During the Dec. 13 summit, Franchot released a 28-page economic impact study concluding that the state’s research institutions and 370 life sciences businesses form what the report’s title trumpets as Maryland: The Nation’s Bioscience Leader.
 
The report, which can be read here, concludes that Maryland’s life sciences industry accounts for $29 billion in economic activity, a total 120,000 jobs reflecting nearly 5 percent of total state employment, more than 11 percent of gross state product ($219.9 billion in 2006, according to the US Bureau of Economic Analysis), and nearly $600 million in state government taxes each year. The report also cites Maryland’s concentration of research powerhouses that includes the National Institutes of Health, the National Cancer Institute, the US Food and Drug Administration, and Johns Hopkins University.
 
The report, prepared by Sage Policy Group, included recommendations intended to boost the state’s life science sector. One suggestion would have Franchot increase the amount of money the state pension fund invests in life science companies. Another would have the state step up its funding of programs that provide seed funds to life science startups.
 
One such program, the Maryland Technology Development Corporation, offers pre-seed and seed funding to businesses in the life sciences and other tech specialties. While its budget technically rose from $4.8 million to $30.5 million over the past two fiscal years, $25 million of the current FY budget is set aside for the Maryland Stem Cell Research Fund. Indeed, spending for TEDCO’s funding operations dipped this fiscal year by $335,000, reflecting a $500,000 decrease for a working loan fund for companies affiliated with business incubators.
 
“I can see doubling or tripling what we currently have as far as tax credits and subsidies,” Franchot said, adding that such assistance now adds up to about $15 million. He didn’t say how large the budgets for those programs should be, saying he would leave that task to O’Malley and lawmakers.
 
Staying Competitive
 
Since taking office in January 2007, O’Malley, a Democrat, has sought to deliver on promises that he would do more to build the state’s life sciences sector than the Republican incumbent he unseated, Robert Ehrlich Jr.
 
In May, O’Malley signed into law Senate Bill 104 and companion House Bill 135, creating the life sciences advisory board as the first step in creating a one-stop agency for companies seeking to relocate to the state or expand existing businesses there.
 
The one-stop approach helped North Carolina’s state-funded Biotech Center persuade Novartis to locate a manufacturing plant in Holly Springs, NC, over sites in Maryland as well as Georgia. The $600 million plant would be the nation’s first to produce cell culture-derived influenza vaccines.
 
From 2004 to 2006, North Carolina surpassed Maryland as number three in Ernst & Young’s rankings of biotech activity; the firm stopped ranking states in 2007.
 
“Nobody really questions whether we’re bigger than California or Massachusetts. But we hated becoming fourth to North Carolina. And I guess this report is in many ways a response to that,” said Richard Clinch, director of economic development at the Jacob France Institute of the University of Baltimore.
 
And like North Carolina, Maryland is deemed the top of the second tier of the nation’s life science clusters. The top tier is headed by the San Francisco Bay Area, followed by Boston/Cambridge, Mass., two regions where institutional research has been spun out into greater numbers of businesses.
 
“Other states, such as Massachusetts and California and North Carolina, are continually investing, trying to get ahead of the curve and get in front of us in terms of leadership,” Franchot said. “We’re always left out of the equation for the crown jewels. Now we’re going to put them back in the equation and market ourselves much more forcefully.”
 
The advisory panel was the most significant of three bills benefiting biotech that O’Malley signed in 2007. The governor also approved measures that:
  • Qualify publicly funded incubators for local property tax credits (Senate Bill 705 / House Bill 327)
  • Commit the state to continue the Maryland research and development tax credit research if a similar federal credit ends or is repealed (HB 1197)
Not approved this past legislative session was a measure that would have increased the aggregate cap for the Maryland Research and Development Tax Credit from $6 million to $12 million, the cap for the basic tax credit from $3 million to $5 million, and the cap for the growth credit from $3 million to $7 million (Senate Bill 232 / House Bill 46).
 
Lawmakers wanted to give the existing system — approved in 2005 and implemented last year — at least a full year of operation before considering any changes [BioRegion News, June 18]. 
 

“Other states, such as Massachusetts and California and North Carolina, are continually investing, trying to get ahead of the curve and get in front of us in terms of leadership.”

Franchot said the state should try again to gain lawmaker approval for raising the tax credit caps. “The reason they failed is that the decision makers in the legislature didn’t fully understand the life sciences and the biosciences are essential to Maryland’s economic future.”
 
The economic impact study made another recommendation: Investing an unspecified amount of the state’s pension fund in Maryland life sciences companies: “I think you can get good policy and a good return,” Franchot said.
 
During the fiscal year that ended June 30, Maryland’s State Retirement and Pension System stood at $39.4 billion in assets, and had generated a 17.6 percent return on assets invested, the highest return in 10 years.
 
But a report released Dec. 18 by the Pew Center on the States offers a clue about why the state may be looking to tech businesses for even larger returns. The report warned that Maryland has set aside only $36 billion of the $44 billion it will owe to retired state workers over the next 30 years — and none of the $14.5 billion in other benefits it will owe during that period.
 
If the state opts to move toward full funding of its non-pension benefits, putting the money in a qualified trust, actuaries have calculated that it will require $772 million annually compared to the $236 million Maryland paid for current retirees in 2006. By pre-funding this obligation, Maryland could reduce its $14.5 billion obligation to $9 billion,” according to a summary fact sheet issued by Pew for Maryland.
 
Winners and Losers
 
While Franchot agreed the state should not “pick winners and losers” among life sciences companies, he added: “You can’t pour more dollars into the private sector, as in the venture capital area, and let them pick the winners and losers based on their track record. Obviously there’s a risk because there are always going to be losers. But there are a lot of winners in Maryland.”
 
The study offered a rosier picture of Maryland’s life science effort than a report issued June 29 by the Economic Alliance of Greater Baltimore. The public-private economic development group released a report, Biosciences in Greater Baltimore, recommending that the state do more to attract life science companies to the Baltimore region, in part by streamlining an attraction effort that it said now involves too many state and local economic-development groups [BioRegion News, July 9, 2007].
 
The 40-page report can be read here.
 
However, Franchot said the regionalism cited in the Greater Baltimore report was only a secondary issue during the summit: “We placed emphasis on getting the Baltimore and Washington regions to understand that together they have some real status, and trying to break down some of the geographical divides that have traditionally balkanized Maryland and prevented it from making as much progress as we can.”
 

 
State’s Tight Finances Cloud Prospects for New Subsidies
 
Should legislation to boost support for Maryland’s life sciences industry emerge in 2008 as sought by Comptroller Peter Franchot, the prospects for approval by state lawmakers are increasingly uncertain as the state’s finances continue to tighten.
 
According to the state Board of Revenue Estimates, which Franchot chairs, the state expects a slower revenue increase this fiscal year than in past years — up 2.2 percent, followed by a 5.2 percent jump in FY 2009. But real estate transfer taxes are expected to slip 11 percent, to $188.6 million this fiscal year, before rising to $199.3 million for the fiscal year starting next July 1.
 
During the year that ended June 30, transfer taxes fell to $212.5 million — nearly 20 percent, or $52 million, short of the projected $264.5 million, due to the slump in the real estate market.
 
“Fallout from the housing market seems likely to hold back the state’s economy through 2008, directly or indirectly affecting every industry,” the board wrote in a report released earlier this month, Estimated Maryland Revenues, Fiscal Years Ending June 30, 2008, and June 30, 2009.
 
Fearful that the fallout could worsen the state’s annual structural deficit of $1.7 billion — which officials have blamed on a 1998 tax cut and a school funding increase four years later — state lawmakers last month approved $1.3 billion in tax hikes. They include a 1 percentage-point sales tax increase, from 5 percent to 6 percent; a $1-a-pack hike in cigarette taxes; a $400 million transportation fund; and a new sales tax on computer services of 6 percent that was opposed by the Tech Council of Maryland, which runs the state’s life sciences industry group MdBio.
 
On Dec. 18, the Spending Affordability Committee consisting of General Assembly leaders issued a report advising Gov. Martin O’Malley to limit to $847 million, or 4.27 percent, the increase in general and higher education state spending he will propose next month when he submits a budget for the year beginning July 1, 2008. That would produce a spending plan of about $20.7 billion.
 
Despite the numbers, Franchot said he expects the state will increase funding for life sciences programs next year and beyond.
 
“We’re talking about not increasing taxes. We’re talking about growing a sector of the economy that fits very nicely with Maryland’s strength, which is its well-educated workforce,” the comptroller said. “Once the leaders focus on the benefit of growing that sector and frankly the tax revenue that would come from that growth, I believe they would supply the appropriate subsidies to move that forward.”

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