General Dynamics doesn't need Connecticut's money

Hundreds gather as General Dynamics Electric Boat hosts the Christening Ceremony for the 15th Virginia Class, fast-attack submarine Colorado at the Electric Boat campus in Groton Saturday, Dec. 3, 2016.  (Tim Cook/The Day)
Hundreds gather as General Dynamics Electric Boat hosts the Christening Ceremony for the 15th Virginia Class, fast-attack submarine Colorado at the Electric Boat campus in Groton Saturday, Dec. 3, 2016. (Tim Cook/The Day)

General Dynamics is not a poor company.

Far from it.

Like all of the country's top defense contractors, its stock is trading at record highs. As of this writing, one share in the Falls Church, Virginia-based company costs more than $226, nearly $55 more than tech giant Apple.

General Dynamics' current market capitalization, a measure of a company's value, is $67.2-billion, up $14.6-billion from 2016. To put that into context, Connecticut's entire gross state product was $228.5-billion in 2017.

On a recent earnings call, CEO Phebe N. Novakovic told analysts the company's revenue last year exceeded $31.7-billion, outperforming the prior year by $412-million. Cash flow for the year was $3.45-billion.

And things should only get better.

As Chief Financial Officer Jason W. Aiken pointed out, the newly enacted Republican tax law will lower the company's effective tax rate from 28.6 percent in 2017 to an expected 19 percent this year. Novakovic called the news "a happy event."

But, despite revenue in the billions of dollars across all divisions, including the Marine Systems Group, which includes Electric Boat, the company wants $150 million from Connecticut to offset infrastructure improvements and employee training at its Groton shipyard. The hope is the subsidy will help ready Electric Boat to build the U.S. Navy's next fleet of nuclear-armed submarines, a project the Congressional Budget Office has said could cost taxpayers up to $104-billion.

State Sen. Cathy Osten, D-Sprague, has stepped forward to propose the bill.

This comes on top of a separate $60-million deal General Dynamics is currently pushing in Maine for another subsidiary, shipyard Bath Iron Works.

In Rhode Island, General Dynamics is capitalizing on millions of dollars in grant money and tax credits for workforce training.

But, if you take a minute to evaluate all the facts here, it's hard to understand why elected officials in states that have faired far from favorably in the post-Great Recession era would even consider diverting their limited resources to a company performing so well.

There's a saying in the defense industry that "Boeing makes planes, Raytheon makes missiles, and General Dynamics makes money."

If you look at the company's balance sheets and federal disclosures made by its top brass, you'll know why. Between 2013 and 2016 Novakovic and the company's four highest paid executives took home $150.3 million in compensation, more than enough to cover the subsidy package being sought from Connecticut. According to the UMass Lowell Center For Industrial Competitiveness, Novakovic netted $49-million between 2013 and 2016.

Rhode Island officials said last year the average Electric Boat worker being trained with government funds started at an annual salary of $35,600, a yearly compensation 441 times less than the $15.7-million the CEO made in 2016.

On top of this, the company has spent $10.1 billion since 2014 to buy back its own stock on the open market, including $1.5 billion last year. By comparison, the company spent just $200 million on employee pension contributions in 2017.

Relatively few people outside of finance know what stock repurchasing is, but academics who study the tactic are highly critical. They say buybacks mostly benefit executives with pay tied to stock performance — nearly 43 percent of Novakovic's compensation between 2013 and 2016 came from stock-based pay. 

Because buybacks were mostly avoided prior to a Securities and Exchange Commission rule change in the 1980s, the criticism goes that the diversion of corporate dollars to share repurchasing has contributed significantly to a new Gilded Age in the U.S. and the stagnation of worker wages.

In the case of General Dynamics, the story doesn't end there. Since 1997, the company has received more than $315 million in state and municipal subsidies across the country, including a nearly $200-million mega deal from the state of Maine, close to $42 million from Connecticut, and more than $17 million from Rhode Island, according to the Washington, D.C.-based policy resource center Good Jobs First.

When I asked William Lazonick, co-director of the Center For Industrial Competitiveness and a leading expert on stock buybacks, what he made of all this, his response was this: "I think, as taxpayers, we're being taken for fools."

Indeed.

As the old saying goes, there is a difference between what you want and what you need.

General Dynamics might want $150 million from the state of Connecticut, but it certainly doesn't need it.

Alex Nunes is a freelance journalist who has reported for The Providence Journal, Rhode Island Public Radio, and his own website, nunesweekly.com. He is a former online editor for The Day and regularly contributes dining reviews.

 

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