Could incentives keep C-17s aloft for Long Beach?

In a novel approach to battle defense cuts, Boeing Co. and Long Beach officials are finalizing an incentive package they hope to take to Washington D.C. next month to convince lawmakers and Defense Department officials to spare the C-17 military cargo plane from budget cuts.

The incentive package, which could include reductions in Boeing's lease rates and water and electricity bills, as well as state tax credits, is aimed at knocking several million dollars off the production costs for each C-17 in the hopes that defense officials would be less willing to end the program.

Last month, an Air Force official indicated that the Pentagon was leaning toward ending purchase orders for the C-17. In response, Long Beach officials assembled a "red team" of city, utility, regional and state officials who have come up with about two dozen ways to cut costs for Boeing at its facility near Long Beach Airport. Among the more unusual proposals: Long Beach would assume control of the facility's fire department, which is currently operated by Boeing.

"We're treating this just as if we were trying to woo a business into the city. We're looking for any way we can find to shave operating costs, to make the program more attractive," said Robert Swayze, economic development bureau manager for the city of Long Beach.

On a separate track, Boeing, Long Beach and other elected officials are mounting an all-out push to convince both the Defense Department and Congress on the military value of the cargo transport plane.

All this is aimed at maintaining C-17 production at Boeing's Long Beach plant. About 6,500 Boeing employees work on the C-17 program, which pumps an estimated $1.4 billion a year into the local economy. That figure does not include the hundreds of millions of dollars in economic impact from the nearly 500 Boeing suppliers in California that provide parts and initial assembly for the plane.

But Long Beach's red team approach is admittedly a long shot. The Pentagon is looking to cut billions of dollars from parts of its budget; at best, any package of incentives that the city and state put together would be in the tens of millions of dollars, far less than the production cost of even one C-17 plane.

"This is clearly an uphill struggle," one official on the red team said privately.

Since the program's inception in 1988, Chicago-based Boeing has produced 144 C-17 planes, with the 145th plane due for delivery later this month. Initially, the planes cost more than $200 million each to produce; now, Boeing has whittled down the cost to about $185 million per plane, according to Dan Page, director of airlift business development for Boeing.

The C-17 is currently funded through 180 planes, which would keep the production lines rolling in Long Beach until early 2008. Boeing and local elected officials are trying to push legislation now in both houses of Congress that would fund 42 additional planes, which would keep the production lines humming through 2010.

Faced with mounting costs for the war in Iraq and overstretched military deployments, Pentagon officials indicated last fall that they were seriously considering axing the program.

In late November, Long Beach officials, including Mayor Beverly O'Neill, went to Washington to meet with members of Congress and Defense Department officials to rally support for the C-17. They focused primarily on the military value of the plane and the economic benefits that the C-17 program brings to Southern California.

In the event that President George W. Bush follows the recommendations of his Defense Department advisers and cuts funding for the C-17 in his 2006-07 budget proposal, Congress could act to restore some or all of the funds, which is why local officials met with members of Congress.

The Washington trip represented the more traditional lobbying approach to beat back defense cuts; Southern California officials used it successfully last year to save the Los Angeles Air Force Base in El Segundo from the latest round of base closures. It's been followed up by a letter-writing campaign to President Bush, including letters from Gov. Arnold Schwarzenegger and from members of Congress.

Boeing even went one step further, encouraging its 700 suppliers for the C-17 program in 42 states to write their members of Congress and urge them to show support for the program.

The company has even more to lose than future C-17 orders. In a risky gambit, Boeing has ordered parts from suppliers for seven more planes beyond the 180 authorized.

"We must pay our suppliers for those parts even if the program is stopped," Page said. He did not provide details on how much Boeing is paying for those parts, but the costs likely run into the tens of millions of dollars.

But the post-Thanksgiving Washington trip apparently did not sway Defense Department officials. Last month, Air Force Secretary Michael Wynne said the Air Force supported an internal recommendation to halt the C-17 program at 180 planes. The internal Air Force report favored buying new combination tanker-cargo transport planes instead of the C-17s, which are not equipped to carry additional fuel. The C-17 ferries troops, tanks and various military equipment.

"We are feeling not uncomfortable" with the current planned inventory for the C-17, Wynne said at a mid-December Defense Department briefing. That's when Long Beach officials launched their unconventional approach of a cost-cutting campaign focused on incentives and tax credits. Such a strategy, which is usually aimed at attracting new companies or facilities, has rarely, if ever, been tried in an effort to keep a defense program.

Unique strategy

Long Beach officials assembled a "red team," the code name once given to strike teams in the aerospace industry and subsequently adopted by economic development officials. This red team is composed of officials from several city departments, the County of Los Angeles, the state Business, Transportation and Housing agency and Southern California Edison (a unit of Rosemead-based Edison International).

Long Beach has taken similar actions before, but always for private companies with no taxpayer-funded programs like defense contracts at stake. Two years ago, the city assembled an incentive program for Boeing in an attempt to have the aerospace giant locate production for its 7E7 commercial jet in Long Beach; that effort was ultimately unsuccessful as Boeing decided to set up its final assembly plant in the Puget Sound region of Washington state.

"We prefer to look at this as job creation and retention," said Reggie Harrison, deputy city manager for Long Beach. "We're bringing people to the table and asking them to look at anything they can do to make Boeing's pricing as competitive as it can be."

Over the next two weeks, the red team will meet with Boeing executives to finalize the list of incentives. City officials will then present the list to the Long Beach City Council at a Jan. 24 hearing. Then, Boeing and city officials will jointly present the incentive package to the Department of Defense sometime in February.

"We have a window of about a month before funding decisions get locked in," Page said.

Among the two dozen incentives being considered: cuts in the lease rate that Boeing pays for the portion of its facility on city-owned land; cuts in electric bills; a reduction in rates paid for city-supplied water; waiving of gate fees and other fees for use of the adjacent Long Beach Airport; a rebate of some county property taxes for improvements made to the facility property; and having the city fire department take over from Boeing at a sharply reduced cost.

There is also talk of trying to find one or more tenants to fill some unused space in Boeing's Long Beach facility. The lease payments to Boeing could then be used to lower Boeing's overhead for the C-17 program even further.

City officials are also pressing the state to extend its enterprise zone tax credit program beyond the 2007 sunset date. And the city is also drafting legislation it hopes to unveil later this month in Sacramento to expand an existing tax credit program developed for the Joint Strike Fighter program to include the C-17 program.

State Sen. George Runner, R-Lancaster, carried the Joint Strike Fighter tax credit legislation and has said he is not opposed to expanding it to the C-17.

Whether this effort will be enough to sway Defense Department officials is an open question. At most, whatever combination of incentives is agreed upon this month will only shave a few million dollars off the cost of each plane --hardly enough to aid the Defense Department in its search to cut billions of dollars from its budget.