When Fairfax County officials wanted to encourage Litton Industries Inc. to expand its Reston computer bank, they offered the multibillion-dollar conglomerate a financial plum: a $6 million tax-exempt bond issue that could save the company thousands of dollars.
The Fortune 500 firm did not need the incentive, according to John George, a company spokesman, but it eagerly grabbed it anyway.
"They just gave it to us," he said.
"It certainly was not a prerequisite for expanding," added George. "Our company is large enough to expand without assistance. It's a monetary decision: It costs less to use low-interest money."
Over the years, Fairfax and other local, county and state governments across the country have handed out billions of dollars of loans in the form of industrial development bonds.
In the Washington area, businesses ranging from Heckler & Koch Inc., a firearms importer in Fairfax County, to a Pepsi-Cola Bottlers distribution center in Montgomery County and the National Milk Producers Federation in Arlington have benefited from the low-cost loans.
But in a deficit-conscious era, such largesse on the part of the federal government is under attack for a simple reason: its staggering cost.
This year, according to projections by the congressional Joint Committee on Taxation, about$3.5 billion in federal tax payments will be lost on the approximately $100 billion in industrial development bonds that remain outstanding.
In recent years, Treasury Department officials repeatedly have urged that the program be reined in. This year, as part of Secretary Donald Regan's tax simplification proposal, they want to eliminate it altogether.
Joining the opposition to the bonds are many local officials who believe that frequently, as in the case of Litton Industries, the bonds do not accomplish their purpose of encouraging economic growth.
"It's welfare for developers," said Fairfax Supervisor Audrey Moore. "It's an expense that's not doing the general public any good."
"They're not needed," said Fairfax County Executive J. Hamilton Lambert. Noting that there is a limit of $10 million on each loan, he added: "None of the big companies use them . . . or those that do would have come here anyway."
This year, Fairfax County has given out $41.4 million in industrial development bonds.
"It doesn't cost the county a nickel," said Thomas M. Davis III, a Republican Fairfax County supervisor. "The federal government gives you this tool; you'd be stupid not to use it."
The industrial development bond program is set up in such a way that the only responsibility a local government has in the process is to approve applications from firms desiring to participate.
If the firms are approved for the program, they obtain low-interest loans directly from banks. The incentive for banks to participate is that they do not have to pay federal taxes on interest that they earn on the loans.
Industrial development bonds differ from the general obligation bonds used by governments to finance public projects in that they are financed only in private markets and cannot be bought by the public.
The use of such bonds to stimulate economic development is not new. Congress approved the concept more than 50 years ago, giving states and local governments the authority to use the bonds.
Mississippi was the first to participate, and eventually the idea was embraced by Northern states fighting to stem the flight of industry to the Sun Belt.
By 1968 the annual nationwide volume of these bonds had risen to $1.8 billion, and they now are used in virtually every part of the country.
In the past, the District of Columbia was prevented by its charter from issuing such bonds, but it began issuing them this year for the first time, reviewing and tentatively approving $300 million in bond issues.
Over the years, bonds have been used for everything from massage parlors to hot-tub facilities and golf courses. After widespread criticism that the program was getting out of hand, Congress clamped down, prohibiting certain uses for the funds and imposing a $10 million limit on each bond issue. This year it placed a ceiling on the amount of bonds each state can authorize.
Despite criticism of the program, some officials maintain that it has been a success. Officials in Prince George's County and Alexandria, for example, say that the bonds have been vital to spurring economic revitalization.
"Millions of dollars in construction have taken place in Alexandria because of these bonds," said Alexandria Mayor Charles E. Beatley Jr. He added, however, that the city did not know how much of the development might have taken place without the bonds.
Many firms that have taken advantage of the cut-rate loans in the Washington area have been such major corporations as General Motors Corp., Fairchild Industries Inc., Potomac Electric Power Co., Penn Mutual Life Insurance Co. and Weyerhaeuser Co. In many cases, the corporations would have expanded without the bonds.
"It's common sense," said Douglas H. Poretz, director of corporate affairs for Flow General, a$130 million, multinational biomedical company that received a $2 million industrial development bond loan from Fairfax in 1979. "If a rich person really wants a $300,000 house in McLean, he'll look for the best mortgage possible. But if he can't get a really good mortgage, he'll still buy the home.
"But if someone has to stretch to buy the $300,000 home, then they're not going to move to McLean without the really good mortgage."
The majority of loans go to smaller companies, such as Children's World, which is a day care chain, and to Leesburg Limited Partnership, a computer information system, or to association headquarters such as the National Pest Control Association and the Academy of Model Aeronautics.
And some firms say that the bonds have, indeed, been critical factors in their decisions about where to locate.
Jack Hanchrow, vice president of real estate for Kindercare, a day care chain that has received several industrial development bonds in Fairfax, said that without the bonds the firm probably could not have afforded to set up in Fairfax at this time.
"Because of the high land costs, the operations are marginal," Hanchrow said.
Asked what companies such as Kindercare will do if the industrial development bond program ends, he replied: "We're going to have to become more innovative or become extinct."
The industrial development bond program is scheduled to end on Dec. 31, 1986. Earlier this year the conventional wisdom was that it would be renewed routinely. Supporters and opponents expected the myriad banks, businesses and local governments that profit from these bonds to ensure the program's continuation.
Now, with the deficit reduction fever in Washington, no one is making predictions. Some supporters of the program, such as Sen. John C. Stennis (D-Miss.), argue that eliminating the program will not help to reduce the deficit. Stennis says that the new jobs created by the bonds have brought more money into the federal tax coffers than the tax breaks have taken out.
Supporters promise a vigorous fight to extend the program beyond 1986.
"Clearly, the people who have been using them are not going to let them die," said Richard B. Geltman, general counsel for the National Governors Association, which earlier led the fight against assaults on the program.
Yet even some of the governments that actively use the bonds question how much good they do and whether they should be available so widely.
Beatley, for example, says he thinks that for many groups the lure of tax-exempt financing "ranks very low on the list of things" that motivates companies to move their association or corporate headquarters.
According to James Hughes, a member of the Fairfax County Economic Development Commission, "The only reason we're really doing it approving bonds is because other jurisdictions are."
Some Montgomery County officials say they approach the bond program with the same attitude. But last year the wealthy Maryland county gave out only about one-fourth the amount of bond money approved by Fairfax County.
Some officials contend that the program is poorly monitored by local and state governments.
The Fairfax County Board of Supervisors, for example, purposely avoids close scrutiny of the program, claiming that the county's bond rating could be hurt if one of the firms defaulted on its bond.
As a result, the supervisors approve virtually every industrial revenue bond issue that comes before it, rejecting only 18 proposals out of 139 in the past eight years.
Recently, one Fairfax supervisor questioned a bond application submitted by the husband of a prominent civic activist. Moore, who frequently has criticized the board's lack of scrutiny of these bonds, sarcastically shot back to her colleague: "What, you mean we're actually going to review one of these?"
In Arlington, the County Board has limited the types of businesses that can receive these bonds, but many jurisdictions have few guidelines.
The Prince George's County Council recently approved several industrial development bonds in rapid-fire style, with almost no discussion. When a startled resident approached the podium to discuss an unrelated community project, the council chairman asked: "What? Do you want one, too?"
The indiscriminate way that the bonds are used has fueled the proposals to modify the program.
"We would like to see them targeted to disadvantaged areas and used in a very limited way," declared Cathie Eitelberg, senior legislative assistant for the Government Finance Officers Association, a nationwide organization.