November 10, 2003
States Pay for Jobs, but It Doesn't Always Pay Off
By LOUIS UCHITELLE
New York Times
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."
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