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The BIW Deal:
Economic Blackmail or Outright Extortion?

By Jean Hay
May 1997

For more than a week now, the Legislature has been trying to decide whether or not to play ball with General Dynamics, the corporate owner of Bath Iron Works, which is demanding $194 million in state and local taxes during the next 20 years to help modernize BIW.

Governor Angus King is calling it an investment. Others say it's corporate welfare. Some of us use stronger words.

At issue is $3 million per year for 20 years, for a total of $60 million, to cover BIW payroll taxes. If approved, that state tax money will be added to $81 million in tax relief from the city of Bath, and $53 million in absolved Maine equipment taxes. In return, General Dynamic has promised not to reduce BIW's 7,300-person work force to fewer than 3,500 jobs for 19 of those 20 years.

The $194 million would help pay for a $307 million modernization. Under this plan, the giant defense contractor pays for one-third, taxpayers pay for two-thirds.

The first question is not whether this is a good investment, but whether it is an investment at all. Investments imply something real in return, like company stock. But that option was never part of this equation.

General Dynamics touts this as a jobs program, yet none of this money will end up in the pockets of BIW's workers. In fact, five or six out of every 10 of the current workers will find their pockets emptied entirely. Attempts by lawmakers to reduce the layoff figure to three out of every 10 have so far fallen on deaf ears.

By the way, General Dynamics also doesn't foresee hiring any of the displaced workers to do the modernization work at BIW, despite the fact that many of the same skills are involved. Might cost too much. You understand.

Are we talking corporate welfare? Of course. Problem is, welfare implies need. With good public trade-offs and great corporate need, corporate welfare can sometimes be justified.

So, does General Dynamics really need this money to keep BIW afloat? Lets look at some figures.

James Mellor, General Dynamics' CEO, is paid $11.3 million per year. If he were paid a mere $1.6 million, a reduction of $9.7 million in his annual pay, that reduction alone, spread over the 20 years of this plan, would fund the entire $194 million General Dynamics is asking from Maine taxpayers.

Most people in Maine, if they won a single $1.6 million lottery, would consider themselves fixed for life. A $1.6 million annual salary, even for working hard, is beyond most people's dreams.

Now I know General Dynamics might well claim that an $11.3 million annual salary for its CEO is standard for corporations that size. After all, Michael Jordan was paid about that much to promote expensive Nike shoes, incidentally made by workers overseas at a rate of about $2.50 per day (see: Doonesbury). And Jordan's not even a CEO.

If you want a comparison closer to home, we have the recent example of Hathaway Shirt, where the CEO of its former parent company was making $10 million dollars per year, about what all 500 Hathaway workers in Maine were making, added together.

Based on that, it would seem those high-flying figures are pretty standard. Just one teeny, tiny difference here. At least Nike and Hathaway sell their products to real people. Except for a few minor foreign sales, General Dynamics and BIW only have one customer -- the U.S. government. That means that Mellor's salary is paid in federal tax dollars. That makes him a very well-paid federal employee, wouldn't you say?

On to profits. General Dynamics earned $270 million in profits last year. At $9.7 million per year, General Dynamics could replace Maine's entire subsidy with 3.6 percent of that figure.

But profits can vary year to year. How healthy is this company overall? Very healthy.

The Washington Post reported on April 28 that General Dynamics began 1997 with $700 million in cash and no debt. It also reported that in about two years General Dynamics will cash in on a $750 million federal judgment based on the Pentagon's cancellation of the A-12 jet in 1991.

Todd Blecher of Bloomberg Business News, reporting on the favorable judgment in U.S. Court of Federal Claims in Washington last year, wrote: ``The A-12 lawsuit was filed by McDonnell Douglas and General Dynamics in June 1991, after the Navy canceled the project that January. The Navy said St. Louis-based McDonnell Douglas and Falls Church, Virginia-based General Dynamics lacked the skills and technology needed to build the plane, and had withheld details of problems they were encountering. By January 1991, the A-12 was well behind schedule and over budget. After canceling the project, the Navy tried to recover money it said the companies received for work that was never done. The companies sued, seeking payment for work they said they performed but weren't paid for.''

So, General Dynamics has cash on hand of $700 million, plus $750 million in federal tax money coming in the very near future. That amounts to $1.45 billion, in unencumbered cash.

For comparison purposes, the state of Maine's entire budget for this fiscal year is $1.8 billion.

General Dynamics has insisted that if it does not get this entire package, the deal will fall apart and it will be forced to close BIW. No matter how you count, that is simply not true. General Dynamics has more choices, and more money, than you and I could ever dream about. Making such threats based not on real need but on pure greed puts their demands somewhere between economic blackmail and outright extortion.

And just what would be the repercussions of General Dynamics taking its ball and going home? Would it simply turn its back on BIW, lock the gate and leave the facility to rust into the sunset? Would the city of Bath have taken over the property for unpaid taxes? I think not.

If we turn down this proposal, and General Dynamics decides not to upgrade BIW on its own nickel, chances are BIW would simply be put back on the market where General Dynamics picked it up a mere two years ago.

Now that would be an investment worth looking into.

Jean Hay is a freelance political commentator who lives in Bangor.

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