Expensive Taxpayer Gift Offered to Boeing

March 1, 2011

Investigative Reports

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The NerveAerospace giant Boeing would be a major player in – and likely a main beneficiary of – a $5 million state taxpayer-funded aviation research center proposed by the University of South Carolina.

Without holding any public hearings on the proposal, the S.C. House Ways and Means Committee last week approved the $5 million appropriation, which would be effective after the start of next fiscal year on July 1, to create the “Aviation, Innovation and Research Center.”

The money would come out of the state’s capital reserve fund, which has been used in recent years for deferred maintenance and renovation projects at state agencies, and to lessen mid-year budget cuts in the state’s general fund.

The proposed center would be yet another benefit in a long series of state giveaways to Boeing, a multinational company that earns billions annually.

In a prepared statement provided last week to The Nerve, the university said the proposed center, dubbed “USC-AIR,” enables the university to “create, for the state, an overarching, internationally recognized institute focused on the advancement of the American aviation economy.”

“USC will help advance the state’s vision to serve as an important destination for both large and small companies that contribute to the technology-driven landscape that extends well beyond the manufacturing and assembly of aircraft,” the statement said. “A partnership of this nature between USC and industry partners will drive the research and development focus that will contribute to attracting further aviation/aeronautical/aerospace corporate investment in South Carolina.”

The statement didn’t mention Boeing by name, though university spokeswoman Luanne Lawrence in a written response last week to questions from The Nerve said the university “has had broad conversations with Boeing and other aerospace companies across the state.”

Boeing spokesman Rob Gross declined last week to answer specific questions from The Nerve, saying only in a written response: “Boeing is supportive of efforts to create centers for higher learning in the state of South Carolina that will advance innovations in aviation and aerospace technology, materials and products. We believe that such efforts will help attract high-quality, high-technology jobs to South Carolina.”

Lawrence also confirmed that the university has held discussions with the S.C. Research Authority – a state-created and state-controlled technology and real estate company – and “others” about “a desire to build this center and its potential reach in attracting new aspects of the industry, creating jobs and building strong programs at USC to support new opportunities.”

The Research Authority already is partnering extensively with USC and the state’s two other research universities, Clemson and the Medical University of South Carolina, on commercial research.

Last year, the agency established an “Innovation Center” in Columbia with USC; it also joined with MUSC to open a similar center in Charleston in 2009, and has teamed up with Clemson to open a third center in Anderson this year.

The purpose of the centers is to attract tenant companies to commercialize research at the state’s three research universities.

A Research Authority spokeswoman did not respond last week to written questions from The Nerve.

Boeing ‘Main Supporter’

State Rep. Tracy Edge, R-Horry, prepared the $5 million appropriation proposal for the USC aviation center, Lawrence said, adding that Edge and USC President Harris Pastides have spoken “several times over the past couple of years” about the project.

Contacted Friday, Edge told The Nerve that “Boeing is the main supporter” of the project.

“I think everybody (on the Ways and Means Committee) felt committed to that,” said Edge, a member of the committee. “Boeing had that in mind when they came to South Carolina.”

Edge said there have been “some discussions” among committee members over the past couple of weeks about the proposed center, “but nothing formal” until last week’s vote.

Asked whether it was a wise spending move given a projected $700 million budget hole next fiscal year, Edge acknowledged that the money could have been given to state agencies hit hard by budget cuts in recent years, citing the Department of Corrections as an example.

But, he continued, “At this time, I would rather make a one-time expenditure.”

Edge said it was his understanding that Boeing and other defense contractors, possibly including Lockheed Martin and Johnson Controls, would fund the operations of the aviation center. He described the $5 million appropriation as “seed money.”

“There shouldn’t be any expectation of state money going into the future,” Edge said, though he acknowledged that nothing precludes USC from requesting tax dollars for operations in the future.

Edge said the proposed aviation center would be similar to Clemson University’s International Center for Automotive Research, which has close ties to BMW’s Greer-based operations.

Contacted Friday by The Nerve, Rep. Chip Limehouse, R-Charleston and chairman of the Ways and Means subcommittee on higher education, defended the proposed $5 million appropriation. He presented the budget request to the full committee last week.

“South Carolina’s future lies with the aerospace industry, and we’re going to be a leader in the aerospace industry in this country and in the world,” Limehouse told The Nerve.

Asked whether the proposed $5 million was appropriate given the state’s budget woes and the more common use of capital reserve funds for deferred maintenance projects at state agencies, Limehouse responded: “In a recession, you don’t shirk away to create more jobs. … Deferred maintenance is not going to buy us out of the recession.”

And why were no public hearings held on the proposal? Said Limehouse: “We normally hold hearings on our part of the base budget. This is not part of our base budget.”

Lawrence said it was “too early” to know the projected annual operating costs of the proposed aviation center or who would fund those costs. A site hasn’t been chosen, she said, though she noted that it would have “components in Charleston” and “some on (the USC) campus” … “to start the center on firm ground.”

The $5 million, if approved by the Legislature, would be used to purchase “necessary equipment for research and training laboratories, and to support scientists, technicians and students who will be engaged in this important work,” the university said in its prepared statement.

The university also said it has submitted related proposals for two endowed chair programs that would focus on “composite materials systems” used by the aircraft industry. Boeing, for example, is using composites, which are lighter than standard metals, in the construction of new aircraft.

Under the endowed chairs programs, which are coordinated through the S.C. Commission on Higher Education, state lottery proceeds and non-state matching funds are used to hire nationally or world-renowned professors.

Lawrence said the proposed endowed chair programs would be part of the proposed aviation center. The university also plans to develop an aerospace engineering degree, according to its prepared statement.

Big Taxpayer Bill

Chicago-based Boeing in 2009 announced that it would build a $750 million assembly plant in North Charleston, promising to create at least 3,800 jobs over seven years, for its new 787 Dreamliner aircraft.

It was the single-largest announced investment and job-creation project in state history; the 1.2-million-square-foot assembly plant is expected to open by this July, company officials said earlier.

But in a series of stories last year, The Nerve revealed that state lawmakers were secretive about the total taxpayer cost of the plant.

In a similar precursor to last week’s unexamined move by the House Ways and Means Committee, initial details of the plant project didn’t become publicly known until the Legislature in a rare special session in October 2009 approved the sale of $170 million in taxpayer-funded state bonds for Boeing.

In the first week of last year’s session, a legislative panel called the Joint Bond Review Committee gave initial approval to another $100 million bond sale for the project, which was given quick final approval by the five-member S.C. Budget and Control Board, made up of the governor, state treasurer, comptroller general, and chairmen of the Ways and Means and Senate Finance committees. Each vote occurred without any prior public discussion.

The Nerve’s investigation found that in total, Boeing will receive at least a half-billion dollars in state and local taxpayer-supported incentives for the project, including corporate income, sales and property tax breaks.

By anyone’s account, Boeing is not hurting for money. The company in January reported that its 2010 earnings skyrocketed 152 percent over the prior year, showing full-year net income of $3.3 billion compared to $1.3 billion in 2009.

And last week, the U.S. Air Force announced it had awarded a $35 billion aerial tanker contract to Boeing over the rival parent company of France-based Airbus.

Boeing’s net income last year was more than 60 percent of this fiscal year’s entire general fund budget for South Carolina.

Last year, Boeing contributed $3,500 each to the S.C. House and Senate Republican Caucus committees, state Ethics Commission records show.

Project Slush Fund?

The proposed aviation center isn’t the only economic development effort that would be financed through the state’s capital reserve fund, under the Ways and Means Committee’s proposal.

The full committee last week approved using the fund to funnel $10 million – double this fiscal year’s initial ratified appropriation – to the Department of Commerce’s “deal closing” account, and $13 million – up from $7 million appropriated for this fiscal year – to the S.C. Technical College System for specialized training of plant workers.

Limehouse said the increase for the technical college system’s “readySC” program is meant to “help Boeing and have other money on hand for other big projects.” The technical college system late last year asked for a $2.9 million advance to the program to train Boeing workers at the North Charleston plant; Commerce has projected the total training costs for Boeing workers at $34 million over 15 years.

Limehouse said he didn’t have specifics on the proposed increase for Commerce’s “deal closing” account.

Spokeswomen for Commerce and the S.C. Technical College System did not respond last week to written questions from The Nerve.

Under the S.C. Constitution, the capital reserve fund must be funded annually at a level equal to 2 percent of the previous fiscal year’s general fund revenues.

The fund was depleted in 2009 to help offset mid-year budget cuts, though a constitutional amendment passed by voters in November would end that practice, requiring that the fund be used, when necessary, to replenish the state’s general reserve fund.

For this fiscal year, nearly $111 million was budgeted for the capital reserve fund. The Ways and Means Committee’s proposal earmarks that amount for various projects, much of which is designated for deferred maintenance projects at colleges and universities.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org