September, 1999
  Incentives Deal of the Month
   from Site Selection's exclusive New Plant database

An (Eli) Lilly Blooms in Indianapolis:
Incentives of $214 Million Power $1 Billion, 7,500-Job Deal

A heaping spoonful of sugar -- US$214 million in incentives, to be exact - is helping Eli Lilly & Co.'s (www.lilly.com) big corporate location medicine go down into Hoosier soil. Pharmaceutical giant Lilly recently announced that it's undertaking a US$1 billion, 7,500-job expansion, with most of the location action centered in Indianapolis.

At the same time, the facts suggest that Lilly's blockbuster deal won't go all the way down until the Indiana General Assembly lays to rest a looming "what-if" factor. Then again, with Indiana and Lilly's long and mutually beneficial relationship, everybody in this deal may ultimately go up in robust health.

Regardless of the outcome, Lilly's investment commitment is staggering.

"Lilly's investment in Indianapolis . . . compares to a Fortune 500 company relocating to the city every two years for the next decade," said Indianapolis Mayor Stephen Goldsmith (www.indygov.org/mayor/) at the project's announcement. It . . . represents a huge boon to the economy, These new jobs . . . represent the types of employment opportunities Indianapolis will need to compete in the global marketplace."


Half a Billion Dollars Already Committed

Company officials say that the bulk of the 7,500 new jobs, which will be added over a 10-year span, will bloom at two of Lilly's main campuses in Indianapolis: Lilly Corporate Center and Lilly Technology Center, which will also see new development and infrastructure improvements as part of the investment. But the billion-dollar deal will also create new jobs at the company's other facilities in Indiana, Lilly executives say.

Some of the $1 billion total investment announced in July, however, wasn't exactly new. Lilly's press release announcing the deal noted that "approximately $500 million has already been committed to new construction projects or to complete a variety of projects currently under way."

That's not altogether surprising, as the pharmaceutical industry is undergoing dramatic changes, with rapidly collapsing windows of opportunity for increasingly expensive new product development and release. At the same time, the industry is still shaking from a convulsive series of mergers that have thinned the packs of major pharmaceutical players. Lilly Chairman, President and CEO Sidney Taurel alluded to those challenges as the company's billion-dollar announcement went public.

"Even in view of the great challenges facing the pharmaceutical industry over the next 10 years, we're optimistic about the growth potential of Eli Lilly & Co.," Taurel said. "The expansion plan we announced today reflects Lilly's recommitment to another century of growth in the city of Indianapolis and the state of Indiana as the ongoing hub of our global growth program."


High-End Jobs Part of Lilly's Long Hoosier History

The new Indiana jobs decidedly skew toward the deep end of the remuneration pool, which was likely a major reason that state and local development officials weren't shy about offering big-bucks incentives.

Said Taurel of the new positions that the company will be creating, "Most of these . . . new employees of Lilly . . . will be scientists, physicians, computer specialists and other technicians -- highly educated, highly skilled and highly paid."

Lilly, in fact, even pointed out how important its high-end jobs were for Indiana. The company's press release on the $1 billion investment cited a 1998 Indiana Fiscal Policy Institute study entitled "The Evolution of Indiana's Labor Force" that "found Indiana trailing the nation in high-tech employment," the Lilly release said. The release also noted that "Lilly added 800 of these high-growth jobs to the company's Indiana work force in 1998 alone."

To some observers, that might smack of self-justification. This corner, however, suspects that there's something far more substantial behind the release's choice of words. Lilly is a company that has been homegrown in Indiana and has a long history of making substantial investments in the wellbeing of its home state. It's what used to be called "corporate stewardship," and the facts suggest that Lilly has played that role

Indianapolis, after all, was the birthplace (on Apr. 1, 1885) of Eli Lilly, the man credited with turning the company into a pharmaceutical powerhouse. Young Eli was only the latest Lilly, however, to call the city home. Col. Eli Lilly, in fact, organized the 18th Indiana Light Artillery Battery during the Civil War in the United States.

Moreover, the younger Eli Lilly, who died in Indianapolis in 1977, was a prodigious benefactor for his home state. Donating from both from his personal account and the company's Lilly Endowment, he made substantial contributions that included helping bankroll the Indianapolis Museum of Art, the Children's Museum of Indianapolis, Butler University, Earlham College, Wabash College and the Historic Landmarks Foundation of Indiana.

Given that history, the largesse of state and economic development groups in Lilly's expansion takes on a tenor that's rather different from the one that some casual observers might've deduced.


Meeting Quid Pro Quo Would Yield $684 million in New Payroll

The $214 million in incentives over 10 years is split almost evenly between the state and the city of Indianapolis. The state pledged $108 million, while the city pledged $106 million. Both the Indianapolis Economic Development Corp. (www.iedc.com) and the Indiana Dept. of Commerce (www.state.in.us) "played important roles in the project," Lilly officials noted.

The state's commitment will include $102 million over 10 years in Economic Development for a Growing Economy (EDGE) credits, which entail a job-creation quid pro quo. The EDGE credits are based on Lilly creating up to 7,500 net new, full-time jobs in Indiana. If Lilly meets that commitment, it would yield a total new accumulated payroll of approximately $684 million over the 10-year period in which the credits are dispersed.

Invariably, estimates of the bottom-line wisdom of major incentive packages become political footballs in which facts don't necessarily get off the sidelines (in fact, in some cases they don't even get inside the stadium). The earliest analysis out of the box, which is credited to Lilly, finds that the payroll taxes generated over the 10-year period will be twice the value of the EDGE incentives.


Indianapolis' Urban Revitalization Model Will Get Another Shot in the Arm

The Lilly incentives will also further spiffy up Indianapolis, which is already widely recognized as a model for urban revitalization.

Part of the state's incentives include providing $4.25 million for street and thoroughfare infrastructure improvements. The city also will invest $3 million toward public infrastructure improvements to support business expansion on the south side of downtown Indianapolis, which includes the expansion of Lilly's presence a few blocks immediately west of its existing McCarty Street headquarters.

Those improvements along the downtown corridor Improvement - which have been dubbed "Streetscape" -- will include beautification of the area between the new Conseco Field House to the north and Interstate 70 to the south, as well as a variety of public infrastructure improvements to streets, sidewalks, sanitary sewers, drainage and viaducts.

In addition to infrastructure improvements -- to which Lilly will contribute $3 million of its own funds -- major Lilly expansion projects in the Streetscape area include the Faris and Vasa Brougher office buildings and fitness center on South Meridian Street and a second child-care facility, which Lilly owns, at South Meridian and McCarty streets.

"As the near south side of downtown continues to grow, it has become increasingly important to traffic flow and access for the area," Goldsmith said. "This investment will not only serve Lilly employees, but facilitate future development in the near south side."

In addition, the state will fund a two-year, $2 million renewable grant for work force training through the "Training 2000" program.


Property Tax Abatements

As is the case with most major incentives, substantial property tax incentives are part of the package for the Lilly expansion, which will encompass more than 20 new construction projects.

Indianapolis, for example, is providing a 10-year real property tax abatement for each Lilly investment. With those abatements, Lilly will be able to reduce its tax load by some $50 million, say state economic analysts. However, even with the abatements, Lilly's new capital spending will mean that it will pay an estimated $45 million in new property taxes over the 10-year span, according to Lilly officials' estimates.

Indianapolis has also offered a 10-year personal property tax abatement for Lilly's investments in new equipment. Analysts estimate that that personal property tax abatement could be worth some $48 million - that is, if the Indiana General Assembly approves the package.

And that's where this deal's very big "what-if? rears its worrisome head, at least is past is prologue.


The What-If? Factor

During its 1999 session, the Indiana General Assembly balked at passing the R&D tax incentives that O'Bannon was championing, a fact the governor pointedly noted at the Lilly deal's announcement.

"As you know, we were particularly disappointed that the General Assembly this year failed to enact the initiatives we had proposed - crucial initiatives to provide more tax incentives for research and development in Indiana," O'Bannon said. "We are committed to working to pass that legislation in the 2000 session."

The R&D incentives' failed passage also didn't escape mention by Lilly Chairman, President and CEO Taurel. "The business community remains very concerned about key proposals -- like the R&D tax package -- that were not approved this year by the state legislature," he said.

Lilly's head honcho also underscored the substantial risk that Lilly is taking in making its $1 billion investment commitment.

"Our business is characterized by a high level of risk," Taurel said. "There are no guarantees that our research efforts will result in marketable products or that any new product we do produce will succeed in the marketplace. There are constant threats of governmental rules changes or other challenges to our ability to earn a fair return on the enormous research investments we value."

Taurel, in fact, he even strongly suggested that some sites competing for Lilly's blockbuster investment may have offered superior business climates.

"The reality is that Indiana faces great competition -- nationally and internationally -- for the type of investment and expansion being announced today," he said. "Many of these locations also have superior tax and regulatory climates." And if that didn't elicit a gulp from the Indiana General Assembly's collective throat, we're not sure exactly what would.

Perhaps this will all end as did Eli Lilly's marriage to Ruth Helen Allison. That was Lilly's second marriage, coming after an admittedly sour first union. This one, though, clicked for 50 years, providing "unbelievable happiness and satisfaction," Lilly said.

Perhaps the same happy fate awaits the long-standing Lilly-Indiana relationship that's currently clouded by the little issue of a $1 billion investment.

"Perhaps", however, is a close cousin to "what-if?" And both words now seem to be standing tall, and quite ominously, inside the Indiana legislature's chambers.

Stay tuned.


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