Completed Ship Delivery Method of Accounting
On March 30th Senator Olympia Snowe (R-ME), joined by her colleagues Senators Susan Collins (R-ME), Trent Lott (R-MS) Thad Cochran (R-MS), John Breaux (D-LA), Mary Landrieu (D-LA), John Warner (R-VA), and Robert Torricelli (D-NJ), introduced S.666, a bill to amend the Internal Revenue Code of 1986 to allow the use of a modified version of Completed Contract Method of Accounting for naval vessel construction.
According to Senator Snowe, “Quite simply, this legislation would permit naval shipyards to use a method of accounting under which shipbuilders would pay income taxes upon delivery of a ship rather than during construction.” Senator Snowe pointed out that, “This bill would not reduce the amount of taxes ultimately paid by the shipbuilder. It simply would defer payment until the profit is actually known upon delivery of the ship.”
Shipbuilding is unique because it takes three to seven years to build a technologically sophisticated naval ship, which is the equivalent of a floating city. However, the current Tax Code disregards this fact and places a financial burden upon naval shipbuilders by expecting them to know their profit margin on these complex systems three to seven years into the future.
Currently, the Tax Code requires naval shipbuilders to use the Percent of Completion Method (PCM) of accounting. This method requires a company to estimate the profit they may or may not realize upon completion of a ship and pay taxes annually on progress payments during construction. These progress payments are not revenue, but a source of construction financing. The PCM imposes a severe cash flow penalty on naval shipbuilders during the construction phase by eliminating the resources that could be used to invest in facilities and processes, which would reduce the cost of naval ships to the taxpayer. Neither the Office of Management and Budget nor the Congressional Research Service have demonstrated an ability to estimate with exacting accuracy the revenue the U.S. Treasury will receive years into the future, but the current Tax Code requires builders of naval ships to know their revenue years into the future. Compounding this unfair tax burden is the fact that these companies are not fully paid for the ship until 12 months, or more, after it is delivered to the U.S. Navy.
Passage of S. 666 will remove an onerous financial burden placed upon American shipbuilders, help lower the cost of naval ships, and strengthen the cash flow of the companies as recommended by the Defense Science Board. As Senator Snowe stated, “I believe that this is the most fair and most sensible accounting method. It is the method that naval shipbuilders used to employ. It is the method which commercial builders are permitted to use to this day. As such, I strongly urge my colleagues to join me in a strong show of support for this effort.”
Budget Committees Resist Advance Appropriations
for Naval Ships
As the Navy advances an innovative financing approach for naval shipbuilding called “Advance Appropriations,” the conferees on the Budget Resolution, H. Con. Res. 83, failed to adopt a provision sponsored by Senator Olympia Snowe to retain current scoring guidelines for Advance Appropriations of capital investment projects for all federal agencies, including the U.S. Navy.
Advance Appropriations would enable the Navy to increase and stabilize its ship acquisition program, avoid costly budgetary spikes, and help shipbuilders better plan and stabilize their workload by providing cost savings through economies-of-scale. While this full funding mechanism has broad support in Congress, the Office of Management and Budget (OMB) urged the House and Senate Budget Committees not to open the door for Advance Appropriations for naval shipbuilding – despite the many advantages of this approach for the taxpayer.
It is perplexing that OMB supports Advance Appropriations to fund federal buildings, but not for federal cities at sea. In spite of congressional action, efforts continue within the Pentagon to promote Advance Appropriations as the most cost-effective and affordable means to rebuild our nation’s naval fleet.
Representatives Spence and Taylor
Call for Rebuilding U.S. Naval Fleet
In a recent Roll Call – Defense & Aerospace Policy Briefing, dated Monday May 14, 2001, Chairman Floyd Spence (R-SC) and Ranking Minority Member Gene Taylor (D-MS), House Armed Services Military Procurement Subcommittee, decried the shrinking state of today’s Navy and called for an increase to the Navy’s shipbuilding budget to maintain a bare minimum 300-ship fleet.
Representative Taylor wrote, “We need a long-term average build rate of 10 ships per year. This average must be maintained every year in order to maintain a 300-ship Navy. Unfortunately, we’ve been well below that average for nine years (an average of six per year), We have a deficit of 36-ships.” Chairman Spence noted that, “The latest shipbuilding plan, provided by the Navy with the FY ’02 budget, average only 7.4 ships per year through fiscal 2005 – well short of the minimum required to sustain the current fleet. If these construction rates are not increased, we will be ‘building’ a Navy of about 220-ships.” Chairman Spence added, “We must buy more ships.”
Senate Fights for Title XI Ship Loan Guarantee Program
Senate Majority Leader Trent Lott (R-MS) and 38 of his colleagues went on record with a letter to Chairman Judd Gregg (R-NH) and Ranking Member Fritz Hollings (D-SC) of the Senate Commerce, Justice, and State Appropriations Subcommittee in support of a $100 million fiscal year 2002 appropriation for the Maritime Administration's Title XI Ship Loan Guarantee Program. This powerful group of Senators stressed that Title XI is “far from an unnecessary corporate subsidy, but rather a stabilizing force to the defense industrial base as it has grappled with major defense reductions over the past decade. Beyond its importance to the shipbuilding industry, Title XI has generated roughly $150 million in revenue from fees charged to Title XI applicants since 1993. Leveraging several more private dollars for each dollar provided under the program.” The program has also resulted in cost savings to the taxpayer in lower priced naval ships.
The following Senators joined Majority Leader Lott in stating their support of $100 million for Title XI: Daniel Akaka (D-HI), George Allen (R-VA), Joseph Biden (D-DE), Barbara Boxer (D-CA), John Breaux (D-LA), Maria Cantwell (D-WA), Thomas Carper (D-DE), Lincoln Chafee (R-RI), Max Cleland (D-GA), Thad Cochran (R-MS), Susan Collins (R-ME), Jon Corzine (D-NJ), Christopher Dodd (D-CT), Richard Durbin (D-IL), John Edwards (D-NC), Jesse Helms (R-NC), Kay Bailey Hutchison (R-TX), Daniel Inouye (D-HI), John Kerry (D-MA), Herb Kohl (D-WI), Mary Landrieu (D-LA), Joseph Lieberman (D-CT), Barbara Mikulski (D-MD), Frank Murkowski (R-AK), Patty Murray (D-WA), Jack Reed (D-RI), John Rockefeller (D-WV), Rick Santorum (R-PA), Paul Sarbanes (D-MD), Jeff Sessions (R-AL), Richard Shelby (R-AL), Gordon Smith (R-OR), Olympia Snowe (R-ME), Arlen Specter (R-PA), Debbie Stabenow (D-MI), Robert Torricelli (D-NJ), John Warner (R-VA), and Ron Wyden (D-OR).
Industry News
ASA Welcomes New Partners!
* Corrosion Engineering Services (CES), of San Diego, CA, is the only firm supplying complete corrosion control services under one brand. CES offers survey, project management, engineering, application, design, training, risk assessment and information technology services to commercial and government customers. The 350 engineers, technicians and specialists at CES provide cost-effective, innovative corrosion control solutions that maximize the service lives of systems and equipment. Most recently, CES has partnered with the U.S. Navy in the identification and implementation of advanced coatings and materials for current and future platforms.
* BWX Technologies is at the forefront of emerging nuclear technologies, providing advanced manufacturing capabilities, special materials processing, and sound environmental redemption management for complete nuclear life cycle stewardship. BWX Technologies has developed the unique capability of full life-cycle management of special nuclear materials, facilities and technologies. Whether powering the U.S. Navy's nuclear fleet, managing the cleanup of the U.S. Department of Energy's nuclear sites, or developing advanced energy systems, BWX Technologies has earned its reputation by satisfying the unique demands of their customers.
Bath Iron Works Opens $240 Million Land-Level Transfer Facility
On Saturday May 5th Bath Iron Works (BIW) dedicated its new $240 million land-level transfer facility, with the keel laying of the Arleigh Burke-class Destroyer, USS Chafee (DDG-90). The ship, named for the late U.S. Senator John Chafee of Rhode Island, is the 22nd of the class to be built at BIW. Senators Susan Collins (R-ME) and Olympia Snowe (R-ME), Representative John Baldacci (D-ME) and Mrs. Virginia Chafee, wife of the late U.S. Senator, attended the ceremony.
The Land-Level Transfer Facility is a construction platform with three side-by-side shipways that allow for amphibious ships and destroyers to be built simultaneously. Outfit support towers alongside the ships are designed to provide the work force with all the material and services they need. The towers have tool cribs, slump material, stock rooms, office space, restrooms and lunchrooms built in to help improve productivity. Creating a true integrated process team environment, a nearby 75,000-sq. ft. Manufacturing Support Center will house shipyard manufacturing supervision, design, planning, quality assurance office, material control professionals and personnel from Naval Sea Systems Command.
Ingalls Shipbuilding Lands $196.5 Million Naval Contract
The U.S. Navy has awarded an additional $196.5 million to Ingalls Shipbuilding for the continuation of work towards the construction of an eighth WASP (LHD 1) Class large-deck multipurpose amphibious assault ship. “An early start of production of an eighth ship in the class takes full advantage of an ongoing active production line at Ingalls, resulting in more efficient, more cost effective production of the ship -- and savings of hundreds of millions of taxpayer dollars over the life of the procurement process,” said Jerry St. Pé, Chief Operating Officer of Northrop Grumman/Litton Ship Systems.
Well Said!
“It takes years to train and qualify some shipyard workers in their specialties, and this workforce is as much a national asset as the ships they produce or the facilities where they work.”
Representative Floyd Spence (R-SC)
Chairman House Armed Services Military Procurement Subcommittee
Roll Call – Defense & Aerospace Policy Briefing, Monday May 14, 2001
|
