When the market doesn't provide jobs, governments often bribe firms to locate in their jurisdiction. These bribes may or may not work.
=========================================
States Pay
for Jobs, but It Doesn
November 10, 2003
By LOUIS
UCHITELLE
INDIANAPOLIS - A huge, light-gray building,
trimmed
jauntily in blue, rises from the rolling, grassy fields on
the far
side of the runways at Indianapolis International
Airport. From the approach
road, the building seems active.
But the parking lots are empty and, inside,
the 12
elaborately equipped hangar bays are silent and dark. It is
as if
the owner of a lavishly furnished mansion had
suddenly walked away, leaving
everything in place.
That is what happened. United Airlines got
$320 million in
taxpayer money to build what is by all accounts the
most
technologically advanced aircraft maintenance center in
America. But
six months ago, the company walked away,
leaving the city and state
governments out all that money,
and no new tenant in sight.
The
shuttered maintenance center is a stark, and unusually
vivid, reminder of the
risk inherent in gambling public
money on corporate ventures. Yet the city
and state are
stepping up subsidies to other companies that offer,
as
United once did, to bring high-paying jobs and
sophisticated operations
to Indiana. Many municipal and
state governments are doing the same,
escalating a bidding
war for a shrunken pool of jobs in America despite
the
worst squeeze in years on their budgets.
Their hope is
that the new employees at the subsidized
companies will give back their
incomes to the community in
tax payments and spending, more than justifying
the
subsidies. Critics argue that the same tax dollars produce
a greater
return when they are channeled into education and
public transportation, for
example, rather than corporate
ventures. They also say that subsidies distort
markets:
United, for example, might not have walked away so quickly
if the
$320 million had been its money, not the city's and
state's.
And then
there is the view, shared by Gov. Joseph E. Kernan
of Indiana, that the
subsidies are unnecessary, a bonus to
companies that would set up shop
anyway, at their own
expense, without any subsidy. The national economy
would
benefit, if not a particular city's or state's.
That doesn't
mean that Governor Kernan intends to stop
offering subsidies. "I
understand the argument that taking
jobs away from Boston and putting them
here is nationally a
zero-sum game," he said. "But Indiana, like virtually
every
other state, is not going to unilaterally disarm."
Far
from disarming, Indiana's legislature recently revamped
the corporate tax
structure - in effect offering a
reduction in a company's state tax bill - as
an incentive
to locate in Indiana, or to remain here. With the
United
fiasco in mind, the emphasis is on tax credits, the
governor said,
rather than upfront "bricks and mortar
investments in particular projects."
Indianapolis, for its
part, is giving generous support to big employers like
Eli
Lilly, the multinational pharmaceutical company
headquartered here.
Lilly is getting a $106 million package
in exchange for a promise to invest
$1 billion and add
7,500 jobs by 2009.
There is no official data on
how much is distributed in
subsidies across the country. Alan Peters, a
professor of
urban planning at the University of Iowa, and one or
two
other academics have tried to estimate the total loss of
city and
state tax revenue through abatements, lower income
taxes, outright payments,
training grants, wage subsidies
and the like. Their estimates start at $30
billion a year
and range up to $50 billion, with Mr. Peters putting
the
number somewhere in the $40 billions, based on a recent
survey of tax
expenditures.
"It seems like almost every state is giving
away
grandmother, grandfather, the family jewels, you name
it,
everything," Mr. Peters said. The anecdotal evidence of the
escalating
bidding war is greater than the statistical, he
said.
The giveaways
come in many forms. Iowa, for example, has
just authorized $75 million a year
until 2010 to finance
subsidies to corporations. The State of Washington
has
offered Boeing a $3.2 billion subsidy package to locate
the
manufacture of its 7E7 airliner in the state. New York is
creating
more "Empire Zones," which are patches of land set
aside in various counties
where companies can locate nearly
tax free. One way or another, the cities
and states, in
forfeiting more than $30 billion a year in tax revenue,
are
channeling to the private sector enough to hire 375,000
schoolteachers
at $50,000 a year plus benefits.
Until the 1970's, the federal government
financed most
job-creation incentives. The emphasis was on
regional
development, the goal being to subsidize job creation in
regions
with high unemployment. But as the federal role
withered and states and
cities filled the void, the focus
on high unemployment faded. "There is no
pattern at all
anymore in the distribution of subsidies," Mr. Peters
said.
Here in Indiana, where the giveaways top $150 million
a
year, the expectation was that United would by now employ
more than
5,000 aircraft mechanics earning, on average, at
least $25 an hour. And for a
while in the late 1990's, the
payroll approached 2,500 mechanics.
The
mechanics - some trained locally, but the majority
transfers from the
airline's maintenance operations in
California - bought homes, went shopping,
and paid property
and income taxes. In time, the multiplier effect of
their
outlays would have justified the huge public subsidy, city
and state
officials argue, although the benefits were
somewhat offset by the increased
cost of educating the
mechanics' children and providing other public services
for
those who relocated.
"Part of an economic development strategy
includes bringing
skilled people here from other cities, not just
creating
jobs for existing residents," said Melina Kennedy, the
mayor's
deputy for economic development. "I say that
proudly."
United Airlines
conceived of the center during a period of
expansion in the early 1990's,
when it was buying Boeing
737's and Airbus 320's and adding flights within
the United
States. The goal was to keep this growing fleet in the
air,
generating passenger revenue, with a minimum of downtime
for
maintenance. The new maintenance center would help to
achieve this goal by
reducing the number of days required
for "heavy maintenance" - the periodic
dismantling and
rebuilding of an airliner required by the Federal
Aviation
Administration.
Ninety-three cities bid for the center, and
United finally
settled on Indianapolis, promising to add $500 million
of
its own money to the $320 million that the city and state
raised
through bond issues. United's $500 million would go
mainly into future
expansion, and there was expansion. But
in the end, the airline invested only
$229 million. The
city, operating through the Indianapolis Airport
Authority,
even owns the tools arrayed in each of the 12 hangar
bays,
ready for the next tenant.
United plainly drove a hard bargain.
But the deal was
signed during the 1990-91 recession, and the hard
times
encouraged the state to fold some Keynesian stimulus into
the
agreement, said Mark S. Moore, director of public
finance for the state of
Indiana, and one of the
negotiators. "Whether we spent the dollars or United
spent
the dollars, let's not forget it was a recession," he said.
"We put
lots of people to work building that facility for a
lot of years at good
wages."
For a brief period in the late 1990's, United made
a
spectacular success of the maintenance center. It cut by a
third or more
the turnaround time for heavy maintenance,
getting 737's back into the air in
20 days or less.
Numerous special features built into the center helped
to
make this possible: the mechanized, snugly fitting
scaffolds, for
example, which gave the mechanics easy and
rapid access to every inch of an
aircraft's skin; the
automated parts delivery system; the sophisticated
climate
control that kept the temperature at a constant 75
degrees
throughout the cavernous structure, allowing for the use
of
composites in making repairs.
Would United Airlines have built such
a fine center without
public subsidies or tax forgiveness? A United
spokesman,
Jeff Green, declined to even address the question so many
years
after the fact. Mr. Moore acknowledged, however, that
even without a subsidy,
the airline probably would have
built the center somewhere in the United
States.
"They had a vision for this center that would have
set
standards for maintenance quality and turnaround time," Mr.
Moore
said. "Maybe that undercuts an argument for why we
should have been there to
help, but I do think United's
view at the time was to do things
right."
So the city and state gambled, and the gamble eventually
went
sour. Caught up in conflicts with the unionized
mechanics and pushed into
bankruptcy by the abrupt cutback
in airline travel after Sept. 11, United
turned to cost
cutting to survive. Heavy maintenance was a victim. It
went
increasingly to private contractors in the South, who took
longer to
get the airliners back into service. But the cost
of using them was low
enough to offset the loss in
passenger revenue, airline officials
said.
Mechanics in the South earning a third of the wages and
benefits
paid to their counterparts in Indianapolis helped
to make this possible - and
last April, United closed the
Indianapolis center, laying off the last few
hundred
mechanics still there. Penalty payments built into the
subsidy
agreement failed to deter the airline's executives.
Mayor Bart
Peterson and Ms. Kennedy had counted on United's
contract with the
International Association of Machinists
to deter the airline from pulling out
entirely. That
agreement limited outsourcing of maintenance to 20
percent
of the total, and because of it, the mayor and Ms. Kennedy
thought
that United would keep some internal maintenance.
"That's the business we
were fighting to keep here in
Indianapolis," she said. "When they announced
that they had
actually negotiated a provision to let them outsource all
of
it, that really surprised us."
Now the city, through its Airport
Authority, is searching
for a new tenant. Several other airlines have
rejected the
authority's overtures. Like United, they are
increasingly
turning to private contractors, although American
Airlines
agreed last month to maintain its maintenance operation in
Kansas
City after the city and the state of Missouri gave
them new
subsidies.
Fresh subsidies are not publicly on the table
in
Indianapolis as the city and state hunt for a new tenant.
The
candidates include several private contractors,
although they normally rent
large empty hangars, which are
in abundance in the United States. The
machinists are among
those seeking to operate the center, and Ben
Nunnally,
president of Local Lodge 2294, says many of his members
would
accept "significantly less" in wages to go back to
work as mechanics at the
center.
The city and state, meanwhile, are paying $34 million a
year
toward retiring the $320 million bond issue, and the
Airport Authority is
paying an additional $6 million a year
to maintain the center, an outlay that
United once
shouldered, along with nearly $700,000 a year for
the
lease.
"I will tell you," Ms. Kennedy said, "that it is
painful
from the city's perspective to be paying debt service on
the
facility" and not have the jobs. "But having said
that," she added, "it is
what it is and now we are
motivated, as we always have been, to fill the
center."
http://www.nytimes.com/2003/11/10/business/10STAT.html?ex=1069477497&ei=1&en=6a4601949642125d
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