Steven Pearlstein: A wrongheaded race for Northrop Grumman's headquarters

Wes Bush, Northrop Grumman's chief operating officer, and other top executives would commute from Potomac, McLean and Georgetown.
Wes Bush, Northrop Grumman's chief operating officer, and other top executives would commute from Potomac, McLean and Georgetown. (John David Mercer/mobile Press-register Via Associated Press)
By Steven Pearlstein
Wednesday, March 3, 2010

There's nothing quite like the prospect of landing a corporate headquarters to get the competitive juices flowing among local politicians and economic development officials.

Never mind that virtually every credible study finds that using taxpayer subsidies to chase after corporate locations rarely pays off. These testosterone-filled contests are never really about money so much as pride and ego and political bragging rights. By the time the competition ends, the benefits from winning have been pretty much bargained away and everyone comes off looking rather silly.

The latest example involves Northrop Grumman, the giant defense contractor whose plans to move corporate headquarters from Los Angeles to the nation's capital have touched off a furious competition among Maryland, Virginia and the District.

Once Northrop tipped its hand and announced its intention to move to Washington, the right response from the region's political and economic leaders should have been obvious: Praise the company for its wise decision but agree not to be lured into an unnecessary and costly bidding war with tax breaks and other subsidies.

The reality is that the financial incentives will not be the deciding factor.

For starters, all three jurisdictions are now so invested in the competition that they all will agree to match the highest offer in the end. That means the final decision will be based on other criteria, such as the cost and quality of the headquarters building; the prestige of its location; the proximity to the airport or to customers; and, most important, the ease of commuting for the chief executive and his top associates, who live in Potomac, McLean and Georgetown.

Moreover, the financial incentives may seem large from the taxpayer perspective, but these are so immaterial to Northrop's balance sheet, the company won't even be required to disclose them to shareholders.

The financial mismatch is particularly acute now that state and local budgets are under severe strain. Maryland and Virginia are each looking at revenue shortfalls in the next budget cycle of $2 billion, with Fairfax County facing a budget gap of $250 million and Montgomery County more than double that. Residents of the region face the prospect that kindergarten slots will be reduced, substance-abuse programs will be closed, government employees will be furloughed and badly needed transportation projects will be put on hold.

Notwithstanding this fiscal distress, local officials are tripping over themselves for the privilege of handing over $25 million or more to a giant corporation with annual revenue of $34 billion -- roughly on a scale with the budgets of Virginia and Maryland -- that last year posted an operating profit of $2.5 billion. At $25 million, the handout comes down to about $75,000 for each job that Northrop promises to move to the region.

For the District, which is looking at a $200 million budget shortfall next year, getting into this bidding war is particularly loony. Virginia and Maryland officials can argue at least that the winner of the headquarters sweepstakes would collect income taxes on all those highly compensated executives, even if they commute home elsewhere. That's the way the tax system works in most places, but not in the District, which is prevented by Congress from imposing an income tax on employees who commute in from Virginia, Maryland or any other state. Without that, it would take decades for the District to recoup the $24.5 million that the mayor and D.C. Council have offered Northrop over the next 10 years.

District officials are also kidding themselves if they think the accountants, engineers and retired generals who run the defense industry are going to give serious consideration to moving their headquarters to the still largely vacant neighborhood near the new baseball stadium. These are not hip, young, urban pioneers we're talking about -- and in any case, they're likely to be Dodger fans.

Maryland is also on a fool's errand. Northrop is not going to locate in the Rockledge Office Park in Bethesda, as the state has proposed, because that's where Lockheed Martin, its biggest rival, has long had its headquarters. And if Northrop is moving across the country so that its executives can just hop in a car and drive to meetings at the Pentagon or on Capitol Hill, they might want to check out the traffic on I-270 before signing that lease in Rockville, another proposed location.

What about National Harbor in Prince George's County? Somehow I just can't see the Northrop brass mixing it up with the tool-and-die salesmen from Peoria attending their annual convention at Gaylord's.

It should have been obvious from the beginning that Northrop is only going through the motions of creating this faux competition to squeeze more millions out of its first and only choice, Virginia, whose new Republican governor is desperate to show he's "creating" jobs. But it's more than ironic that, having spent the past year lambasting Democrats for taxing and spending, Republican Bob McDonnell now can't wait to lavish millions of taxpayer dollars on a Fortune 500 company that makes all its money selling stuff to -- who else? -- the government.

It's not too late, however, for McDonnell to renounce this kind of socialism, call up Gov. O'Malley and Mayor Fenty and, in the name of fiscal sanity and regional unity, propose a financial disarmament treaty. The leaders could jointly withdraw their offers of subsidies and instruct their economic development teams to work together in helping Northrop find the best location. No matter where the company ends up, they could even agree to share the costs and benefits involved.

There's no reason that Northrop's move to the Washington area can't make everyone a winner. This mindless and expensive competition, however, will make losers of us all.

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