Subsidizing Federal Contractors: A New Norm?

May 28, 2015

An $87 million subsidy package for military contractor Lockheed Martin has sailed through a special legislative session in Arkansas. The package is meant to support the company’s bid for a contract with the federal government to produce military vehicles.

With almost no opposition, legislators voted to issue general obligation bonds , an unusual practice in economic development, to pay for infrastructure improvements, job retention, and job training at the company’s facility in southern Arkansas. In return, Lockheed Martin promised to invest $125 million and to create 600 new jobs. Issuing GO bonds means that the state will be liable for paying off the debt, even if the project fails. Fortunately, the lawmakers included some clawback provisions tied to job creation.

It is not the first time general obligation bonds have been used for a manufacturing project. In 2013, Arkansas issued $125 million in GO bonds for the Big River Steel project, and in 2000 Mississippi issued $295 million in the same bonds to pay for subsidies that lured Nissan to the state.

The total cost of the Lockheed Martin bonds, after accounting for all fees and interest costs, will be between $109 million and $122 million.

However, the bonds will be issued only if Lockheed Martin wins the contract with the Department of Defense. The company is competing against Indiana-based AM General and Oshkosh Defense, located in Wisconsin. So far, those competitors have not asked for state subsidies.

Subsidizing bids for federal contracts is an unusual practice but is not unprecedented. Last summer California approved $420 million in tax credits, also for Lockheed Martin, in support of its bid with Boeing for an Air Force bomber contract. Soon after, another military contractor, Northrop Grumman, demanded and received a similar package from California. The Air Force has not yet announced the winner of the competition.

State subsidies can create an unequal playing field between competing contractors, but it is not certain that the Arkansas financing will give Lockheed Martin any advantage. In any event, let’s hope  this practice does not become the new norm.