Junk Bonds

Duluth on the hook for Northwest's unpaid maintenance base taxes

Northwest Airlines hasn't paid taxes on its Duluth maintenance facility since May 2005. Yeah, that maintenance facility, the one Minnesota taxpayers built for it in exchange for the airline's promise to create and retain decent jobs for skilled union mechanics. And the one where nothing's happened since last August, when those union mechanics struck because of the elimination of their jobs.

The Duluth Economic Development Authority is supposed to make a $340,000 payment today on the $16 million loan that financed construction of the base. According to published reports, the airline was to pay the agency $556,000 this year.

Art Rolnick, senior vice president of the Federal Reserve Bank, warned of this very scenario back when Gov. Arne Carlson and Rep. James Oberstar proposed a state bailout package the last time Northwest said the sky was falling. When states and municipalities compete for the chance to subsidize business--even in the name of job creation--Rolnick has long maintained taxpayers lose. He's not thrilled about being right.

"Obviously there's a risk when you get into these bidding wars," he says. "But they seldom talk about this when setting up one of these deals. It's never mentioned." And even if the possibility gets raised, he notes, it's rarely prepared for with any teeth. When Northwest first started reneging on the original deal, the state cheerfully pasted on some term-softening codicils. Adding insult to injury, the collateral for the loan is a 180,000-square-foot aircraft maintenance facility that will now be used by no one.

Another irony: The pension- and union-dumping bankruptcy strategy playing out at Northwest right now was first honed by United. Guess what else United pioneered?

In 1994, Indiana and Indianapolis shelled out $800 million to construct a huge, new, 248-acre, state-of-the-art maintenance facility for United Airlines at Indianapolis International Airport. In exchange, United was supposed to create 6,300 jobs. The airline hired only half that many people before abandoning the facility in 2003. The state and city, which now own it, have been scrambling to fill the empty hangars.

After agreeing to overhaul the facility and coming up with a series of incentives costing as much as $15,000 per job, Indiana taxpayers finally lured two new tenants, both maintenance outsourcing companies, according to the magazine Overhaul and Maintenance. In addition to airline contracts, one of the two companies hopes to find machine shop, sheet metal, and composite work. Even though the new jobs pay about half as much as the old ones, the first job fair staged by the new tenants attracted 3,600 résumés. According to Airline Business, many of the applicants were former United workers.

(That snippet, by the way, comes from a detailed investigation of Northwest's maintenance outsourcing plans published in these pages 15 months ago.)