CENTER FOR Houston?s Call to Action 3/22/2018 This report was created at the request of Center for Houston’s Future by KPMG. In preparing and providing this report, which was developed pro bono, KPMG has undertaken no role and expresses no view that could be considered public policy advocacy or lobbying. This report was developed as a holistic work and should be read only as such. Center for Houston’s Future A Call to Action  Houston MSA’s long trend of economic outperformance has been disrupted, suggesting the existing ‘growth model’ be reexamined and potentially changed  When faced with similar crossroads – natural disaster, industry shifts, or other disruptions – peer cities have demonstrated an ability to transform and thrive  Houston MSA’s current challenges suggest an opportunity for leadership to adopt similar strategies 3 Houston MSA has held a long standing economic advantage (especially in terms of discretionary income growth), though recently we’ve slipped Houston MSA and US per capita net earnings Per Capita Net Earnings ($USD), Inflation Adjusted 42,000 39,000 Long term GDP growth also advantaged, yet advantage is magnified when coupled with affordability 36,000 33,000 30,000 27,000 24,000 Houston US 21,000 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 0 Net Earnings: Earnings less housing and taxes Note(s): Per Capita Net Earnings adjusted using US Bureau of Labor Statistics Inflation Calculator Source(s): US Bureau of Economic Analysis 4 Houston MSA’s relative economic success has been proven to link back to three key catalysts Houston MSA Growth Catalysts US Economic Growth Dr. Gilmer & the Institute for Regional Forecasting Model • Provides Houston an independent center of economic and forecasting expertise, conducting bi-annual symposia on Houston’s economy since 1984 • Led by Dr. Gilmer, previous VP/senior economist at the Federal Reserve Bank of Dallas Work on Texas’ economy has been recognized in the Wall Street Journal, The Economist, and Forbes (35%) Upstream Oil & Gas Industry Growth • Primary generator of high multiplier jobs • • Low housing cost, pro growth Model architecture (35%) Infrastructure & Pro-growth Enablers (30%) • Immigration across socio economic groups • Isolates US economy vs. Houston specific economic drivers • Model back-tested over 1996 – 2016 period to ensure validity Note: In addition to the above factors, foreign trade has been key to Houston’s long-term growth. Furthermore, the recent petrochemical boom has helped bolster Houston’s economy over the past several years Source(s): Dr. Bill Gilmer from the U of H Institute for Regional Forecasting 5 Post 2014, Houston MSA’s economic advantages have been disrupted Then Infrastructure Upstream Oil & Gas Inclusive Economy Now Pro-growth policies and investments enabled rapid development Limits of Houston MSA’s pro-growth model are being reached (e.g., congestion, watershed destruction) While cyclical, O&G industry predominantly headed ‘up and right’ Increasing probability of ‘Lower for longer’ or Lower Forever’ Growing economy attracted immigrants – education often ‘imported’, rest of system adequate Less educated population out of balance with escalating job requirements 6 Center for Houston’s Future A Call to Action  Houston MSA’s long trend of economic outperformance has been disrupted, suggesting the existing ‘growth model’ be reexamined and potentially changed  When faced with similar crossroads – natural disaster, industry shifts, or other disruptions – peer cities have demonstrated an ability to transform and thrive  Houston MSA’s current challenges suggest an opportunity for leadership to adopt similar strategies 7 Oklahoma City is an example: took actions around infrastructure, business renewal, and talent after losing a major United Airlines depot Case study framework Call to Arms What Leadership did Oklahoma City Call to Arms: United chose not to move a major depot to OKC, citing ‘poor quality of life’ Infrastructure enhancement: • Voter approved, Metropolitan Area Projects (MAP) revitalization • Repurposed old warehouses for residential space Business rejuvenation: • Stabilized existing industries (purchased aero plant for Air Force program; incented shale drillers to stay in OK) • Collaborated with Brookings on an innovation district driving health, energy, and aerospace Talent influx: • Downtown renewal and Innovation District attracted talent What led OKC and other case study cities to success? An integrated plan tying infrastructure investment to retaining and attracting specific businesses and talent Other cities in KPMG’s ‘Magnet City’ case studies include: Denver, San Francisco, and Pittsburgh Source(s): KPMG Magnet Cities, CityLab, SF Gate, San Francisco Center for Economic Development, New York Times, KPMG Smart Cities, Denver Post, National Renewable Energy Lab, TechStars 8 Other cities have followed a similar integrated path of infrastructure, talent and business rejuvenation to revitalize after a significant disruption Case study framework Call to Arms What Leadership did Why it worked Oklahoma City San Francisco Call to Arms: United chose not to move a major depot to OKC citing ‘poor quality of life’ Call to Arms: Earthquake in 1989 devastated infrastructure and caused $5b in damage Infrastructure enhancement: • Voter approved revitalization projects (MAPs) • Repurposed old warehouses for residential space Business rejuvenation: • Stabilized existing industry (purchased aero plant for Air Force program; incented shale drillers to stay in OK) • Collaborated with Brookings on an innovation district driving health, energy, and aerospace Talent influx: • Downtown and Innovation District attract talent Infrastructure enhancement: • Redesigned for the future (e.g., highlighted waterfront, increased residential space) • Leveraged old industrial sites to expand (e.g., Mission Bay Renewal) Business rejuvenation: • Used tax incentives to target hi tech start ups, and ‘surplus’ from nearby Silicon Valley • Leveraged existing VC focus on tech companies Talent influx: • Attracted talent through urban renewal and hi tech job opportunities Denver Call to Arms: 1980’s oil glut edged Denver into a recession Infrastructure enhancement: • Dedicated task force (Greater Denver Corp) and Metro Vision plan • Designed suburban business area with urban amenities (Denver Tech Center) Business rejuvenation: • Preserved old energy (e.g., shale drillers, new BP HQ) • Moved into new energy (e.g., Solar Energy Lab repurposed as renewable R&D center) • Tech Center now focused on energy tech VC and startups Talent influx: • Targeted energy & tech talent through accelerator programs • Nurtured VC growth through tax incentives Integrated plan tying infrastructure investment to attracting specific businesses and talent Source(s): CityLab, SF Gate, San Francisco Center for Economic Development, New York Times, KPMG Smart Cities, Denver Post, National Renewable Energy Lab, TechStars 9 The successful turnaround of Oklahoma City and other cities that experienced similar disruption suggests several key takeaways Leadership ‘call to arms’ Infrastructure rejuvenation • Existing assets • Future business needs • Workforce vision Business rejuvenation • Existing assets • Existing capabilities Talent attraction and retention • Role of infrastructure • Business opportunity • Cities all recognized the need, and the opportunity, for change • Oklahoma City: United depot loss • San Francisco: 1989 earthquake devastating infrastructure • Denver: 1980’s recession due to oil & gas dependency • Implemented specific infrastructure projects (e.g., San Francisco ‘Mission Bay Renewal’, Denver ‘Greater Denver Corporation’) • Repurposed existing and designed new infrastructure with a mind towards the future (e.g., old industrial site rejuvenation) • Rejuvenated existing assets in line with business goals (e.g., Denver solar energy facility turned into a Renewable Energy lab) • Implemented specific business initiatives aligned with strengths (e.g., Denver Tech Center attracted telecom and cable companies, major tech and other corporations later followed) • Offered economic incentives and accelerator programs (e.g., SF attracting Silicon Valley talent, Denver tech accelerator programs) • Ensured infrastructure and rejuvenation plans were attractive to talent (e.g., urban renewal in SF and Denver attracted new and helped retain current talent) Source(s): KPMG Magnet Cities, CityLab, SF Gate, San Francisco Center for Economic Development, New York Times, KPMG Smart Cities, Denver Post, National Renewable Energy Lab, TechStars 10 Center for Houston’s Future A Call to Action  Houston MSA’s long trend of economic outperformance has been disrupted, suggesting the existing ‘growth model’ be reexamined and potentially changed  When faced with similar crossroads – natural disaster, industry shifts, or other disruptions – peer cities have demonstrated an ability to transform and thrive  Houston MSA’s current challenges suggest an opportunity for leadership to adopt similar strategies 11 Where does Houston stand against these key levers? Magnet City Model Leadership ‘call to arms’ Infrastructure rejuvenation • Existing assets • Future business needs • Workforce vision Business rejuvenation • Existing assets • Existing capabilities Talent attraction and retention • Role of infrastructure • Business opportunity 12 Call to arms Houston MSA leadership has initiated the call to arms… Houston Leadership: This is a wake up call As disappointing and heartbreaking as [not making the Amazon cut] is, it serves as a wake up call that we must move at a much quicker pace -Sylvester Turner, Houston Mayor Houston did not make [Amazon’s] short list…we are obviously disappointed and believe this is a wake up call for Houston -Bob Harvey, GHP CEO Source(s): Houston Chronicle, Greater Houston Partnership 13 Call to arms …and the public appears ready to respond Houston public receptive No excuses: we need to fully understand why Houston didn’t make the [Amazon] cut. And we need visionary leadership to make sure this doesn’t happen again Houston’s infrastructure – water lines, roads and bridges, and stormwater systems – is crumbling, and the problem needs a [large scale] solution -Houston Chronicle -Houston Business Journal Houston’s oil industry is crucial, but we need to be able to diversify and be a part of America’s future How do you attract the talent of the 21st century? Houston has to turn itself into a destination of choice. Quality of life is now essential to [Houston’s] economic prosperity -Houston Chronicle -Houston Public Media Source(s): Houston Chronicle, Houston Public Media, Houston Business Journal 14 Infrastructure The gap in Houston infrastructure – largely in place decades ago – is clear Houston infrastructure timeline vs. MSA Population growth Continued population growth with little investment has resulted in unmet infrastructure needs A city of 750,000 – 1.5 million plans for a future of growth, and delivers MSA Population(a) Infrastructure Category Lake Conroe 8,000,000 Lake Houston Reservoirs & Lakes Lake Livingston Barker Addicks 7,000,000 Metro Rail Roads & Freeways “A 'do nothing' alternative is not sustainable… we believe a certain complacency has developed” –Russ Poppe, Harris County Flood Control Executive Director 6,000,000 GPW BW8 610 Ft. Bend Parkway 5,000,000 249 Hardy Westpark 225 290 288 I-10 I-69 / 59 I-45 Gulf I-45 N 4,000,000 3,000,000 Barbours Cut Port Bayport Widening Deepening Port C D E & New Runway IAH Airports 2,000,000 1,000,000 Hobby Intl. Term. 1890 1893 1896 1899 1902 1905 1908 1911 1914 1917 1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 New Terminal 0 Note: (a) Population by county summed to determine total population – included counties currently in Houston MSA (Austin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, Waller) Source(s): City of Houston, U.S. Census Bureau, Port of Houston website, Houston Freeways Stotbloom, Harris County Flood Control District 15 Infrastructure Several infrastructure initiatives are in place, yet key questions remain Current Houston MSA infrastructure initiatives Downtown Plan Modernizing and revitalizing Houston’s downtown district by 2036 • Innovation district • Building residential units • Connectivity improvements (e.g., electric vehicles) • Walkability and greenspace MetroNext Improving Houston’s transportation system to support population growth • Improved accessibility • System expansion (e.g., rail, park and ride) • Increased connectivity The Cannon Co-working ecosystem for Houston’s entrepreneurs, small businesses, and freelancers • New Founder’s District (24+ acre campus) • Discounted professional services • Do we have an adequate plan (and funding) in place to upgrade weather infrastructure and address related development policies? • What is the right balance between addressing near term vs. longer term infrastructure needs? Should an integrated program be explored? • Are we developing infrastructure in alignment with our business rejuvenation and talent agendas? Source(s): Houston Plan Downtown, MetroNext, The Cannon 16 Business rejuvenation Though differences in views exist, relying primarily on an O&G upcycle to drive high quality job growth appears increasingly problematic Houston MSA oil and gas related jobs versus peak quarter ‘000s • What is a Houston MSA’s sustainable growth rate? 250 Current Downturn 240 • What industries / job creation options exist beyond oil & gas to achieve this growth rate? Peak Year: 2014 230 220 Institute for Regional Forecasting ‘outlooks’ 210 Optimistic ~70,000 high value jobs lost 200 Lower for longer 190 180 Lower forever 170 160 150 0 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 Quarters from peak year Note(s): Jobs consist of oil production, oil services, machinery, and fabricated metals – change from SIC to NAICS coding results in classification change Source(s): US Bureau of Labor Statistics; The Institute for Regional Forecasting 17 Business rejuvenation Job growth modeling Modeling was conducted to answer the key question: to what extent does Houston need to diversify to maintain an outperforming economy? Modeling Approach • Used IMPLAN economic development model Historical O&G growth • Selected key sectors for job diversification through a multi-screening process Upstream Oil & Gas employment • Set target of outperforming peer city average annual growth rate (2.1%)(a) ‘Lower for longer’ • Modeled extent of diversification beyond oil and gas required ‘Lower forever’ Limited Selective Significant Degree of diversification Note: (a) Average employment CAGR from 1990 – 2016 of key peer cities outperforming US employment growth: Austin, Atlanta, Dallas, Denver, Oklahoma City, Phoenix Source(s): Bureau of Economic Analysis, Bureau of Labor Statistics 18 Business rejuvenation Job growth modeling Sectors for diversification were selected based on connectedness to Houston, economic value add, and growth potential Selective Diversification Significant Diversification Existing presence Existing capabilities and/or high applicability Healthcare manufacturing 5 year CAGR: 7.1% 2017 jobs: 2,631 Data Science & Programming 5 year CAGR: 2.9% 2017 jobs: 30,885 Healthcare R&D(a) 3 year CAGR: 1.7% 2017 jobs: 27,407 Computer systems & engineering 5 year CAGR: 2.8% 2017 jobs: 37,813 Plastics manufacturing 5 year CAGR: 1.3% 2017 jobs: 6,525 Power transmission(a) 5 year CAGR: 2.0% 2017 jobs: 9,539 Chemical manufacturing 5 year CAGR: 1.7% 2017 jobs: 14,428 Utility scale renewables 5 year CAGR: 3.2% 2017 jobs: 706 Note: (a) CAGR from 2013 – 2016 due to availability of data Source(s): US Bureau of Labor Statistics, IMPLAN 19 Business rejuvenation Job growth modeling The scenario modeling considers a combination of oil & gas sector employment growth and diversification across selected sectors Scenario Outline Peer city annual growth rate: 2.1% Back to the future: Cyclical oil price rebound reestablishes Houston’s economic growth to match rate of peer cities(a) Back to the future Historical O&G growth Upstream Oil & Gas employment 2.08% annual growth ‘Lower for longer’ Maintaining current growth Return to outperformance 1.97% annual growth 2.20% annual growth High risk ‘Lower forever’ 1.62% annual growth Limited Selective Significant High risk: Low oil price coupled with lack of diversification maintains current economic deterioration(b) Maintaining current growth: Selective diversification plus modest oil and gas expansion maintains Houston MSA growth, but does not match peer city levels(c) Return to outperformance: Thoughtful diversification plus modest oil and gas expansion achieves Houston’s outperformance(c) Degree of diversification Note: (a) Employment CAGRs are based on Houston MSA historical data from 1990 – 2014. O&G sector employment CAGR is 2.77%, All other Houston MSA employment CAGR is 2.03%; (b) High risk scenario includes 2.03% CAGR across non O&G employment - no incremental growth across chosen diversification sectors and no growth in the O&G sector is included; (c) Incremental growth across each chosen diversification sector is determined by analyzing how much faster the sector is currently growing over the overall employment CAGR of 2.03%. ‘Lower for longer’ O&G sector growth is approximately 1.3% (matches 1990 – 2014 CAGR). ‘Significant’ diversification includes sectors from the ‘selective’ category. Source(s): US Bureau of Labor Statistics, IMPLAN 20 Job growth modeling Business rejuvenation Overall, significant job diversification will be required to maintain outperformance in the event of low to modest oil and gas expansion Back to the future High risk Keeping up A 1980’s or 2014 rebound in the oil and gas cycle in theory could return Houston MSA to outperforming growth rates, however there is decreasing likelihood of this occurring If an oil and gas rebound does not occur and Houston MSA does not diversify, economic performance will lag the general economy and peer cities Even in a modest oil and gas sector recovery scenario, Houston MSA will require at least selective diversification in order to sustain the current level of economic growth Lacking high oil and gas cyclical upside, more significant business diversification will Return to outperformance be required to return to economic outperformance as witnessed through 2014 21 Business rejuvenation Many business rejuvenation efforts are underway, however the question of urgency around diversification remains Current Houston MSA business rejuvenation initiatives The Cannon Co-working ecosystem for Houston’s entrepreneurs, small businesses, and freelancers • New Founder’s District (24+ acre campus) • Discounted professional services Houston Exponential Creating a hub to nurture tech-driven startups and attract venture capital • Innovation district • Accelerator programs • Working closely with local government Station Houston TMC Innovation Connecting Houston’s startup economy and innovation ecosystem • Innovation district • Connect companies with venture capital and corporations • Provide startup resources Uniting healthcare innovators with academia, science and medicine • Streamlining development of medical devices and technology • Access to TMC resources and experts • What level of effort and urgency is required to push beyond the traditional oil and gas business? • Do the planned business initiatives synergize effectively with existing assets and capabilities? Do they leverage the current skill base? • Can we attract the entrepreneurial talent relative to targeted innovation initiatives? Source(s): The Cannon, Houston Exponential, Station Houston, TMC Innovation, Greater Houston Partnership 22 Talent ‘Left-behind’ talent initiatives are crucial, as Houston’s job market is at risk of a supply and demand imbalance Houston MSA population forecast (2030) vs. Percent of Houston MSA ethnicity groups with a college degree (2016) Asian & Other White 11% 29% 43% Hispanic Education Population White Asian 56% 17% African American 13% 42% 26% African American Hispanic Educational Demand for Jobs (1973 vs. 2020) 7% 21% 11% 100% Current Houston MSA ‘left-behind’ initiatives Upskill Houston Helping develop skills and opportunities for middle-skill job market • Focus on Houston key businesses (e.g., healthcare, petrochem) • Industry-led collaboration • Training & job placement Early Matters Raising awareness about the importance of early education • Improving quality of and access to education • Reducing dropout rates • Prioritizing funding based on return on investment 36% 40% 42% 32% 12% 1973 2020 Master’s Degree or Better Associate or Bachelor’s Degree High School Diploma or Some College Less than High School • Is it sufficient to continue to import Houston’s educational needs? • What is the risk of a growing undereducated population? • Do we have sufficient programs in place for vocational training? • Are entry education levels accessible and viable across the diversified population? Source(s): US Census Bureau, Kinder Institute for Urban Research, Georgetown Center on Education and the Workforce Analysis 23 Talent Additional initiatives around future talent, to support diversification moves, are also underway Current Houston MSA talent initiatives The Cannon Co-working ecosystem for Houston’s entrepreneurs, small businesses, and freelancers • New Founder’s District (24+ acre campus) • Discounted professional services Innovation District Downtown district dedicated to startup growth • Part of Downtown Plan and Houston Exponential • Catalyzing formation of innovative startups to grow central city innovation economy U of H Data Science Center Expanding Houston’s educational focus on data science • Cybersecurity, healthcare, energy, and infrastructure focus • Focus on building data science talent base Rice Liu Innovation Lab Supporting Rice students in entrepreneurial endeavors • Expanded entrepreneurial courses • ‘Start-up’ learning programs • Led by Rice’s entrepreneurial initiative • Are local universities (Rice, U of H) producing the right talent needed for the future? • Do the current infrastructure plans (e.g., Innovation District) create a ‘city of the future’ that will attract innovation talent? Source(s): The Cannon, Houston Plan Downtown, Houston Chronicle, U of H, Rice University 24 Where does Houston stand against these key levers? Magnet City Model Leadership ‘call to arms’ Infrastructure rejuvenated • Existing assets • Future business needs • Workforce vision Business rejuvenation • Existing assets • Existing capabilities Talent attraction and retention • Role of infrastructure • Business opportunity • Clearly exists • Crumbling infrastructure needs repair • Beyond repair, what is needed to enhance target businesses and attract desired talent (new mobility paradigm)? • How will we fund new infrastructure? • Significant public / private efforts in building innovation ecosystems underway • What is the link to the assets we have and what we already do well? • How do we retain current talent? • How do we handle the growing ‘left-behind’ issue? • What is the nature of the new talent we seek to attract, and how can we attract this talent? 25 Potential Center Initiatives – Initial Thoughts • The Center’s Role • Infrastructure rejuvenation • • Business rejuvenation • • • Talent attraction and retention • Decide to what degree the Center should be focused on addressing current imperatives (e.g., weather infrastructure, ‘left-behind’ education) versus shaping and orchestrating a future vision Communicate the imperative to integrate infrastructure, talent and business rejuvenation plans Determine if participation in Rockefeller resilient cities initiative is additive to addressing Houston ‘ante to play’ infrastructure issues, or if other actions are required Identify opportunities to influence infrastructure plans (e.g., Downtown Plan, MetroNext) towards business and talent imperatives Assess if participation in the current Houston Exponential focus area study would be feasible and beneficial Finalize scope and launch ‘Future of Energy in Houston’ study Determine if ‘left-behind’ education challenges are being sufficiently addressed (e.g., UpSkill Houston, Early Matters, Center Immigration Study) or if additional action is required Partner with local universities to share perspectives on opportunities to play a differentiated role in Houston’s development 26