Hollywood's obsession over runaway production: eyes wide shut.

Hollywood loves a good story. And what could be more gripping than the one about the United States losing thousands of high-paying production jobs to Canada, Australia and other nations around the world?

A report commissioned by the actors and directors guilds recently found that in 1998, the United States lost $10.3 billion of film and TV activity, plus 20,000 full-time-equivalent jobs, to "runaway production."

State and federal legislators rushed to introduce tax-break bills. Hollywood union officials waited, and the Hollywood Reporter proclaimed. "U.S. Production in Fight of Its Life."

There's just one problem with the story. It's not true.

An examination of the economic data shows that runaway production is far less of a catastrophe than some Hollywood hand-wringers have contended. Consider the following:

* The number of L.A. County entertainment-industry jobs (motion pictures, TV and commercials) has risen by 137 percent over the past 12 years. There has been a 5 percent drop in the last 18 months, from 132,400 to 126,200, but the numbers have remained in a relatively narrow range over the past three years.

* Nearly 70 percent of all U.S. feature film production starts took place in California in 1998, and the state's 510 feature starts last year was more than six times the number in Canada, Australia and the U.K. combined.

* Nationwide, employment in entertainment-related production and services continues to rise - hitting 240,000 as of last year, more than double the 113,700 level of a decade ago.

* The number of production days for TV and films in L.A. County was up 72 percent between 1993 and 1998. For the first half of 1999, production days fell 11 percent, but that's as much attributable to the drop-off in the number of studio features as to any overseas activity.

* L.A. County had about 31,000 post-production jobs in 1997, up 50 percent from 1993. The number of writers employed under guild contract for screen, television and pay television rose to 4,490 in 1998, up 18 percent from 1993.

* Membership in the Screen Actors Guild is now 96,000, up from 90,000 last year.

With L.A. being the primary residence of top producers, talent agencies and entertainment management firms, pre-production activity is unlikely to go anywhere soon, either.

"Los Angeles is to the entertainment industry as Silicon Valley is to the Internet industry," said Tom Lieser, director of the UCLA Anderson Forecast. "You may see Internet companies sprouting up elsewhere, but you're not going to see the big companies move out of Silicon Valley."

John Nendick, managing partner of Arthur Andersen's global entertainment and media practice, notes that as world demand for product keeps increasing, "it's only natural that global production will also increase. But Hollywood will remain the entertainment capital of the world."

To be sure, more television movie and small-budget films are being made abroad. most of them in Canada, and fewer are being made in L.A. Studio executives acknowledge that the savings offered by favorable exchange rates, lower labor costs and tax incentives are too enticing to pass up.

"On a movie-of-the-week that costs between $3.5 million and $4 million, we can save between $500,000 and $700,000 by going to Canada," said Mitch Akerman, executive vice president of television production at Walt Disney Co.

"Thus far this year, we trove shot five movies-of-the-week. Three were in Canada, two were done in L.A. Last year, we made 10 movies: eight were in Canada, one in Atlanta and one in Budapest."

But the savings from filming outside the United States often don't directly translate to the amount of money lost back home. Without cheaper alternatives to make certain kinds of television shows and movies, they probably wouldn't get made at all.

"Clearly, the trend that can't be disputed is that (U.S.) production companies in Canada are hiring Canadians," said Lisa Rawlins, vice president of studio and production affairs at Warner Bros. and former director of the California Film Commission. "But the measurement of dollars lost is impossible to determine. And in general, no one has taken a specific look at how much money is leaving California. Yes, everybody seems to be making fewer shows now. But (if more were made), would they be shot in L.A.? You don't know."

Exactly, say the Canadians, in response to the furor that has been raised by the tax incentives and lower labor costs they offer to budget-conscious production companies.

"Many of the productions shot here wouldn't have occurred without a (Canadian) partner to help finance it," said Alan King, president of the Directors Guild of Canada. "A great deal of work is provided here now that would not exist otherwise."

PriceWaterhouseCoopers LLP, which was commissioned by the DGC to study the report of the Directors Guild of America and the Screen Actors Guild, concluded that only $573 million in runaway production expenditures had flown to Canada in 1998 - not the $2.8 billion that had been claimed.

But union and industry, officials in the United States accuse Canada of disguising the number of American productions.

"The Canadians count certain productions as Canadian. A significant amount of that production is only Canadian because a shell company has been set up as a corporation to get tax credits," said Bryan Unger, DGA associate Western executive director. "It's almost hypocritical for them to say it's Canadian production because they say on the other hand that they are doing so well in getting U.S. production."

Yet the DGA/SAG report, which was prepared by the Monitor Co., bears some scrutiny as well. While it assesses the total economic impact of runaway production in 1998 as 14 percent of the industry's economy, it doesn't say how that compares historically.

Asked for additional data, the DGA only provided numbers for 1990, when it calculated a $2 billion economic loss from runaway production out of the $25.6 billion generated by the domestic industry - or about 8 percent.

The issue of runaway production is hardly new. In the mid-'80s, there were similar cries from local entertainment workers, though it mostly involved productions moving to less expensive states, like North Carolina, Texas and Florida. Those states continue to depend on what is primarily television production "Dawson's Creek," for example is made in North Carolina.

Ironically, the DGA/SAG report highlights the troubles those states are now experiencing. Money spent on production in North Carolina, for example, has dropped 35 percent between 1995 and 1998, with Washington state. Illinois and Texas seeing declines of 37.5 percent, 19.8 percent and 31 percent, respectively.

Canada is seen as taking away some of this activity - and to some extent, the numbers bear that out.

As a component of total U.S.-developed production, runaway production to Canada rose to a high of 37 percent in 1998 from 31 percent in 1997, according to the DGA/SAG report, but it was 34 percent in 1996 and isn't that much higher than the 29 percent in 1990.

And the numbers used could be misleading - projected budgets for feature film and television productions are largely gleaned from estimates from trade papers, not from submitted budgets.

"The production numbers are inflated in the (DGA/SAG) report," said a production executive who requested anonymity. "They assume an average movie budget of something like $35 million, which is ridiculous."

Nevertheless, the issue has gained steam in Sacramento and Washington, as well as in Calgary. In the past few weeks, Canada's Ambassador to the United States, Raymond Chretien, and Rep. Howard Berman, D-Mission Hills, have exchanged letters over the issue, with Chretien calling the DGA/SAG report "vastly overstated," and Berman responding that the study's "methodology is sound, and the results are accurate."

Noting that tax rebates of up to 22 percent of a production's spending on Canadian labor is common practice, Berman wrote that "it is becoming increasingly clear to us that we too must move in some way to protect our indigenous product."

A bipartisan group in Congress has presented a set of proposals for wage tax credits and tax incentives to keep production ill the United States, and hearings before the House Ways and Means Committee are expected to begin sometime in the fall.

Also, California Assembly members Sheila Kuehl, D-Santa Monica, and Scott Wildman, D-Los Angeles, introduced two tax-break bills that have passed through committee but have yet to be voted on by the full Legislature.

Unions like the DGA and SAG have been instrumental in pushing for legislation, as have ad hoc groups like the Film and Television Action Committee, comprised of industry working people, small businesses and actors. The studios have stayed out of the controversy because it might be counterproductive to lobby for tax breaks at a time when their executives are making millions in salaries, stock options and perks, and continue to pay A-list stars $20 million a picture.

"Nobody wants the studio involved in that labor issue," the production executive said. "By stepping forward, we don't help."

Legislative redress won't correct lower labor costs or a weaker currency found in other countries, industry insiders note. And production workers may have to take comfort in the cyclical theory of the current downturn, and the high probability that L.A. will remain the center of the entertainment universe.

"Production considerations may take some shows to Canada or Australia or Italy," said Rawlins. "But the base of operations is here. This is where people have lunch, where deal, are made. This is the epicenter of the entire industry."

RELATED ARTICLE: The Players and Their Agendas

At issue is the cause and effect of filming U.S.-developed movies and television shows outside this country - and whether it is a serious enough problem to warrant state and federal action. Here's a look at the key players:

UNIONS - The Directors Guild of America and the Screen Actors Guild commissioned a report concluding that runaway production cost the United States $10.3 billion of the $74.3 billion spent on theatrical films and television in 1998, with 81 percent of the lost spending going north to Canada. The guilds have lobbied along with other groups for both state and federal tax incentives similar to the ones in Canada and elsewhere that give rebates for using domestic labor. The Writers Guild of America has been largely silent on the issue. Thomas Short, president of the International Alliance of Theatrical Stage Employees and Moving Picture Technicians, has downplayed the subject, saying, "Do you see any big erectors out by the studios, taking them down to Long Beach port, shipping them off somewhere?"

STUDIOS AND NETWORKS - Executives readily admit that more movies of the week are being produced overseas in the interest of saving money. Disney, for example, made eight of its 10 movies-of-the-week in Canada last year, saying it saved between $500,000 and $700,000 per $3 million movie. Of the 48 television movies or miniseries now in production for the current season at CBS, 15 were made outside this country, or about the same number as last year. Studio executives say they are sympathetic to the plight of production workers losing their jobs, but they have stayed out of the lobbying effort for legislative action.

LEGISLATORS - A bipartisan group in the House of Representatives has introduced a set of proposals for wage tax credits and other incentives to keep production in this country. Hearings before the House Ways and Means Committee are expected to begin sometime in the fall. Reps. Xavier Becerra, D-Los Angeles, and Mark Foley, D-Florida, are expected to take the lead on the legislation, which includes a 10 percent tax credit for labor costs, tax-exempt financing for film and television productions, and credits against the interest on production loans. Rep. Howard Berman, D-Mission Hills, while not on the Ways and Means Committee, has been outspoken on the need to address the runaway production issue.

Meanwhile, California Assembly members Sheila Kuehl, D-Santa Monica, and Scott Wildman, D-Burbank, introduced two tax-break bills that have passed committees but have yet to be considered by the full Legislature. They may well be combined into a single bill.

CANADA - The number of U.S.-developed film productions has risen in Canada over the past few years, thanks to a weak Canadian dollar, lower labor costs, and tax incentives for using Canadian workers that amount to more than 20 percent of labor costs. British Columbia leads the way in growth, having seen U.S. productions rise by 17 percent in 1997, 28 percent in 1998, and a projected 35 percent in 1999. The Canadians maintain that foreign exchange, not tax rebates, is the primary reason for the growth. They also argue that Canada accounts for 10 percent of North American television viewers and 10 percent of the film box office, and is thus entitled to some of the work. Finally, Canadian filmmakers and politicians argue that many of the projects filmed in Canada wouldn't be made otherwise, something U.S. studio executives say is largely true.

AD HOC - The Film and Television Action Committee was formed by "below the line" workers in the industry and issued a report of its own pointing to the decline in feature film and television movie starts in the United States. FTAC has organized rallies in Sacramento calling for legislation to stem runaway production. In addition, producer Doug Claybourne ("The Mask of Zorro," "Money Train") has formed a group of producers, agents and support vendors called Entertainment Coalition of 1999 that is trying to persuade "above the line" talent to take up-front pay cuts to save costs and keep productions in the U.S. The money would be repaid if a film did a certain amount of business. So far he has found little enthusiasm within the industry.

- John Brinsley

Staff Reporter Edward Pettersson contributed to this story