BIW owner posts 14.4 percent gain in ’98

WASHINGTON — The lean years of the early 1990s are over for General Dynamics Corp., the U.S. Navy’s biggest shipbuilder and the owner of Maine-based Bath Iron Works.

General Dynamics has completed a phase of post-Cold War downsizing and, after a spree of acquisitions, is posting returns that make competitors’ mouths water. In 1998, the Falls Church, Va., defense contractor earned $364 million, a 14.4 percent boost over 1997.

On top of the big earnings, the company’s stock has jumped 35 percent from a year ago, closing at $60.06 on the New York Stock Exchange on Thursday. It carries little debt, keeps hundreds of millions in cash-on-hand and stands to gain more than $1 billion in a settlement with the federal government. According to a spokesman, General Dynamics has the healthiest balance sheet in the defense business.

“It’s a tremendous performance,” said Peter Aseritis, an analyst at brokerage CS First Boston. “They have great management, a great strategy, and they are very dominant in what they do. They have done a good job making money for investors.”

Those factors have made the company a darling of Wall Street, but some people in Maine aren’t buying it. They are angry that the state Legislature and the city of Bath have promised the cash-rich company tax breaks worth $198 million.

In 1997, General Dynamics’ subsidiary Bath Iron Works — the state’s largest private employer — announced the Legislature would need to help pay for a $307 million modernization or risk losing 7,300 jobs.

The Legislature responded by giving the company a $60 million tax break over 20 years. That comes on top of $53 million in business and equipment tax reimbursements and $85 million in credits from the city of Bath. The total is $198 million.

“You’d think we were the wealthiest state in the nation,” said Orlando Delogu, a professor at the University of Maine Law School. “Instead, we’re one of the poorest states in the nation. And we allow ourselves to be exploited in this way in the name of job creation. It’s unconscionable.”

In November, Delogu and other plaintiffs lost a lawsuit alleging that the Legislature illegally approved the tax breaks for BIW, violating the state constitution’s requirement that taxes be assessed equally. The Maine Supreme Judicial Court ruled that the Legislature acted properly, because the state had a compelling interest in guarding BIW jobs.

But even though the state’s highest court decided that the state acted legally, that does not mean it acted wisely, Delogu said in an interview. General Dynamics has a backlog of $14.6 billion in contracts with the Pentagon and would not think of closing its Bath shipyard before reaping all possible profits, he said. The company bluffed legislators with its threat to shut down the operation, Delogu said.

“This is an extraordinarily wealthy corporation,” he said. “To suggest that they needed the money to undertake the plant expansion is just absurd. It doesn’t even pass the straight-face test. They wanted the money. They extorted the money.”

But state Rep. Arthur S. Mayo III, a Bath Republican who supported the tax breaks, said nobody pulled the wool over his eyes. He said it is a fact of life that businesses will move wherever costs are lower, and Maine had to pony up the money to keep jobs in the state. He said investing in the Bath shipyard will keep Maine competitive with other states.

“It is a very common situation in today’s world that companies are given tax advantages to either remain or expand in geographic areas,” Mayo said. “As a result of the tax advantage, BIW has been able to modernize and to launch ships the way other shipyards in this country launch ships. We’ll be a heck of a lot better off than we were.”

The governor agrees that tax breaks have become a normal part of the government’s dealings with big companies, which can exert massive leverage with the threat to move, according to his spokesman.

“If we don’t offer them tax breaks, someone else will,” Dennis Bailey said. “This was a small price to pay for continued employment and the continued operation of this facility. It is a policy that is predominant, fortunately or unfortunately, throughout the country.”

Even if some people don’t like the tax breaks, it looks like the state will have to live with them. An early effort by a few lawmakers to undo the 1997 law quickly ran out of steam, and a separate campaign by the Maine Committee to End Corporate Welfare failed when the group fell far short of the 51,131 signatures needed to force a referendum on the issue last fall.

BIW plans to start building the centerpiece of its modernization package — an expensive “land-level transfer facility” — on the Kennebec River next spring. The facility will allow workers to build boats on a flat surface, an assembly method that can cost two-thirds less than the present process.

“This project makes us competitive in the marketplace,” said Sue Pierter, a spokeswoman for BIW. “Without it, we could not be competitive. That means we can keep a workforce of about 7,000 people for the foreseeable future, which is not something we would be able to say without that facility.”

General Dynamics president James E. Turner has defended the tax cuts, which he called a smart investment. In a speech to the Bath-Brunswick Chamber of Commerce in January, Turner said the company is pumping $200 million into the state in the next three years to begin the modernization, while the tax cuts are spread out over 25 years.