ON THE HOMEFRONT – IMPACT OF WAR

States Hungry for Defense Step Up Local Recruiting

By DAVID GREENBERG

Staff Reporter

War with Iraq isn’t causing the folks at Ace Clearwater Enterprises to consider leaving California. But it’s a telling reminder for recruiters from Idaho, Nevada and Arizona about the potential economic benefits of having a defense industry in your state.

And the Torrance-based company, which began as an El Segundo welding shop 52 years ago, is listening. Like other companies, it has been hit by unexpected costs related to the state’s fiscal crisis.

“If the cost of doing business continues on its current trend, it could certainly cost some jobs (anyway),” said Gary Johnson, vice president of Ace Clearwater, which makes metal assemblies for military aircraft. “We can’t be operating at a loss.”

The company has no plans to move just yet, but the various promises from the various state representatives no business taxes for two years, free construction of a facility, free employment training or $3 million in moving expenses paid for are more than appealing.

They will become even more so if the state raises taxes and regulatory fees as part of its efforts to chip away at a $35 billion budget deficit. Economists and business owners agree that recruiting campaigns by other states have stepped up, though it’s unclear how effective those efforts have been.

California has been on this road before.

It was only a decade ago that a string of departures by major contractors, including Lockheed Martin and what was then McDonnell Douglas, helped keep the state in recession until the mid-90s and led to thousands of job losses. County employment in defense and aerospace stood at 106,400 last month, compared with a peak of 289,000 in 1986.

“The principal thing is all cities need to establish relationships with their businesses let them know they are welcome and the cities are happy the businesses are located there,” said Joe Arrow, executive director of the South Bay Economic Development Partnership, which represents 15 cities.

L.A.-area business groups have been writing and visiting businesses to educate them on benefits available to ease their pain. Many businesses, for instance, don’t know about state tax credit programs they qualify for when investing in equipment or research and development.

Leveraging energy costs

But the out-of-staters are making their presence felt, singing the praises of low-tax, low-cost climates and perks.

“We tell them Nebraska is a great place to do business,” said Phil Michel, a recruitment consultant to that state’s Department of Economic Development. “Most importantly, after they do make a few dollars, after taxes they will keep more of it.”

Nebraska has been trying to leverage the California energy crisis by touting its industrial electricity rates of 4 cents per kilowatt hour, which is as much as 60 percent lower than many L.A. County locales.

Incentives based on employee payroll and infrastructure investment allow companies to whittle Nebraska’s 7.8 percent corporate income and sales tax down to nothing for the first 15 years of operation.

One juicy target: Los Angeles Air Force Base, which employs 4,300 engineers, computer and satellite technicians, missile system specialists and other support staff at its El Segundo-based Space and Missiles Systems development facility.

As many as 22,000 other aerospace jobs, including 2,300 at the El Segundo-based research and development group Aerospace Corp., are connected to the base. An additional 8,800 service industry jobs everything from retail outlets and dry cleaners to restaurant and health club personnel benefit from its presence.

Sen. Pete Domenici, R-New Mexico, is lobbying for Defense Secretary Donald Rumsfeld to move the operations to Kirtland Air Force Base outside Albuquerque. Domenici’s office didn’t return calls.

Meanwhile, local business and political leaders are scrambling to raise $115 million to build a new base on Air Force-owned land across the street from the existing one.

“If that base doesn’t modernize, it will be a significant candidate for consolidation and moving,” said David Herbst, a consultant to the base, which has $9 billion to $10 billion in contracts at a given time. “It has no runways or airplanes or helicopters. It has old buildings. The assets can be moved.”

Late last year, Boeing Co. decided to keep its Rocketdyne unit in Canoga Park due to the work force and the cost of moving. The rocket engine manufacturer was considering moving to Alabama, where Boeing tests the Space Shuttle main engine, or to Mississippi, where rocket engines are tested.

“Part of any business plan is looking at options for growth and cost control,” said Dan Beck, a Boeing spokesman. “That includes looking at options such as moving facilities.”

While Boeing left Rocketdyne in place, it chose Decatur, Ala. to site a 1.5 million-square-foot assembly plant for its Delta 4 rocket program. The state paid for access road construction and employee training.

“Southern California gave birth to the aerospace industry,” Beck said. “There is a large pool of brilliant engineers here. It’s important to go where the ducks are. But if the business case doesn’t close, then we have to look at other alternatives.”

Wyoming comes knocking

Among California’s drawbacks is workers’ compensation insurance. Ace Clearwater, for example, had no major claims last year but premiums will more than double in 2003, to $560,000.

Then there are the state’s corporate income tax of 9.3 percent, personal income tax of up to 9.3 percent, sales tax of 8.25 percent (which could increase soon), and a new 15 percent surcharge to be added to unemployment insurance fees Jan. 1, 2004. By then, California will have the nation’s highest costing unemployment insurance.

Add other regulatory fees, such as pollution mitigation charges for air and water emissions that are partially paid by general funds in some states but almost solely absorbed by California businesses, and it’s easy to see why L.A. firms are listening to overtures out of state.

“The (tax and fee hike) discussion in Sacramento is all couched in terms of Fortune 500 companies,” said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. “Most of the firms here are small- to medium-sized and that’s not good news.”

Earlier this month, the Wyoming Business Council met with a dozen executives not only with gun-related firms but recreational equipment manufacturers as well as incoming call centers.

With its most populous city, Cheyenne, having only 60,000 residents, the council realizes it does not have the muscle to bring in a major corporation. So officials are pitching the state as an ideal location to for expanding an operation. There is no corporate or personal income tax in Wyoming, and workers’ compensation costs haven’t gone through the roof.

“Wyoming has very little manufacturing,” said Den Costantino, the council’s director of business and industry. “But we have a very attractive economic climate. So we’d like to grow that part of the economy.”