Airline Subsidies: Unfriendly Skies for Taxpayers

March 23, 2010

Investigative Reports

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The NerveA state House bill and related budget proviso that would provide up to $15 million in loans to attract airlines to South Carolina offer no protection to taxpayers, a review by The Nerve has found.

And the measures would make it even easier for airlines to get taxpayer money than what state Rep. Bill Wylie, R-Greenville, the chief sponsor of the proposal, told The Nerve in January.

Wylie at the time made it no secret that he was trying to land discount airline giant Southwest Airlines in the Upstate.

Under his bill (H. 4343), the S.C. Aeronautics Commission could borrow up to $15 million from the state Insurance Reserve Fund to award grants to “regional economic development entities or air service development task forces” to provide “more flight options, more competition for air travel and more affordable air fares for this State.”

A House budget proviso (proviso No. 89.112), offered by Rep. Brian White, R-Anderson, and which passed the House last week, provides the same funding mechanism.

The bill, which has 48 co-sponsors including House Speaker Bobby Harrell, R-Charleston, and Ways and Means Committee Chairman Dan Cooper, R-Anderson, was introduced on Jan. 14 and passed the House on Feb. 26. It is now assigned to the Senate Transportation Committee.

Wylie and White did not respond to written and phone messages left for them last week by The Nerve.

Rep. Herb Kirsh, D-York, told The Nerve after last week’s House floor debate on the budget that he opposes the proviso, which also would provide a $10 million loan, if necessary, from the Insurance Reserve Fund to sponsor the annual Heritage professional golf tournament on Hilton Head Island next year.

“We’re loaning out $25 million; that’s the stupidest thing I’ve ever heard,” said Kirsh, a retired businessman. “We’ve got other things we need to spend the money on.”

Kirsh offered an amendment that would have killed the proviso, but it was split into two questions and tabled upon motions by Cooper. Kirsh is a co-sponsor of Wylie’s bill, though he told The Nerve he would no longer support it as long as it contained the loan provision.

Taxpayers Left Holding the Bag

The bill requires a 25-percent match from the grantee or “local jurisdiction in which it is located” to receive the loan.

Any money borrowed from the Insurance Reserve Fund is supposed to be repaid with interest, calculated by the state Treasurer’s Office, from annual aircraft property tax revenues exceeding $6 million statewide.

But The Nerve’s review found that neither the bill nor proviso has any language requiring the benefitting airlines to repay the loans with their own money should aircraft property tax revenues fall short. Neither measure lists any deadlines to repay the loans.

State taxpayers likely would be left holding the bag in that situation. In fact, the bill requires that the General Assembly annually appropriate money to the “South Carolina Air Service Incentive and Development Fund” in an amount not to exceed $15 million.

South Carolina in recent years has collected on average about $5.5 million in aircraft property taxes, according to state Department of Revenue records, which means none of that money under the bill could be used to repay any loans, given those collection rates.

Under the existing state Air Carrier Hub Terminal Facilities Act, eligible airlines are exempt from paying property taxes on their aircraft for 10 years, so those companies for years likely would not be contributing to the repayment of their loans under Wylie’s bill.

On top of that, eligible airlines or aircraft manufacturers under the act can receive millions of dollars in state bonds that would be repaid entirely by taxpayers.

The Boeing Co., for example, will receive $50 million in bonds this year under the act for its new 787 Dreamliner assembly plant under construction in North Charleston.

The Insurance Reserve Fund provides property and liability insurance to 1,021 state and local agencies. Its fund balance as of last week was about $155 million, said Mike Sponhour, spokesman for the S.C. Budget and Control Board, which oversees the fund.

But the fund lost $4 million last fiscal year, taking in $103.8 million in premiums and paying $107.9 million in claims, according to figures provided by Sponhour.

‘Just An Insurance Policy’

In a Jan. 4 interview, Wylie told The Nerve that he, Harrell and other lawmakers were working to introduce legislation that would provide up to $15 million to reimburse airlines that locate in South Carolina for certain losses up to 24 months.

“There’s no guarantee they’ll get any of the money,” Wylie said then. “It’s just an insurance policy.”

But his bill or the proviso offered by White makes no mention that a loan would be contingent upon any showing of financial losses.

Upstate leaders have unsuccessfully tried to get discount airline giant Southwest Airlines to locate at the Greenville-Spartanburg International Airport.

Wylie in January defended the carrier after The Nerve informed him that Air South, another discount airline that received $17 million in taxpayer-funded incentives, had failed in Columbia in the 1990s after only about three years in operation.

“I know all about it,” Wylie told The Nerve then. “Southwest Airlines has never pulled out of a market they’ve gone into. They are not that other discount airline.”

According to news accounts, however, Southwest pulled out of three markets over its 30-plus-year-history, though it later returned service in two of the cities.

The Nerve reported Wylie’s comments in a Jan. 15 story, which also pointed that Air South was among at least five large companies in South Carolina over the past 12 years to close or be sold after receiving taxpayer-funded incentives.

The Nerve reported Wylie’s comments in a Jan. 15 story, which also pointed out that Air South was among at least five large companies in South Carolina over the past 12 years to close or be sold after receiving taxpayer-funded incentives.

Wylie’s bill doesn’t name Southwest or any other airline. But in awarding grants from the “South Carolina Air Service Incentive and Development Fund,” the Aeronautics Commission executive director must give “highest priority to maintaining affordable airfares to eastern and western United States destinations.”

The bill also assigns priority to “United States owned, publicly traded network carriers” and “proposals that impact a majority of South Carolinians.”

Landing An Airline

“When it comes to Southwest, there are two kinds of airports: Those that have them, and those that don’t,” Frank Manning, general counsel for Columbia Metropolitan Airport, jokingly told The Nerve last week.

Besides Southwest, other discount carriers that potentially could be targeted with Wylie’s bill include AirTran Airways, Allegiant Air, Frontier Airlines and JetBlue Airways, Manning said.

Funds provided under the bill could be used to offset start-up costs for new airlines, help existing airlines add destinations or flights to particular markets, or allow airports to waive landing fees or other costs to airlines, he said.

Manning said the bill was sent back to a Senate Transportation subcommittee for some “technical changes.” One of the proposed changes would provide that any aircraft property taxes collected in excess of $5.2 million, instead of $6 million, would be used to repay any loans taken from Insurance Reserve Fund.

David Edwards, executive director of the Greenville-Spartanburg International Airport, told The Nerve he expects the bill to be changed to specifically allow airport governing boards to receive state money in addition to local economic development or airport advisory groups, explaining the current language of the bill was modeled after a Kansas law.

Edwards acknowledged that current aircraft property tax collection rates likely would not be enough to quickly repay a large loan. But he said an airport that receives loan money to help an airline could enter into an agreement that would require the carrier to repay any money used to cover losses.

“I think aircraft property taxes should be a last backstop,” he said.

Edwards said incentives are needed to help South Carolina airports attract discount airlines to compete with lower-fare flights offered at airports in Charlotte and Atlanta.

He said, for example, that in the last approximate five years at his airport, annual boardings have dropped from about 900,000 to about 630,000, while “leakage” to mainly out-of-state airports has jumped from about 32 percent to 66 percent.

That, in turn, has discouraged companies from locating in the Upstate because they can get lower fares in Charlotte or Atlanta, he said.

“It really comes down to the bottom line of economic development,” he said.

But there are no guarantees any airline will remain at an airport for a long time. Discount carrier Independence Air, for example, which came to the Greenville-Spartanburg airport in 2004, left less than two years later.

Edwards, who has been the executive director for less than a year, said Independence had a “poor business model.” He didn’t know if the airline had received any state or local incentives.

Reach Brundrett at (803) 779-5022, ext. 106, or rick@scpolicycouncil.com.

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