World Resources Institutepdf.wri.org/bell/case_1-56973-131-4_full_version_english.pdfBoeing s 1992 sales were up 3 percent from 1991 levels to $30.2 billion. Total assets were $18

World Resources Institute

Sustaina A program of the World Resources Institute

ble Enterprise Program

This case was prepared by Dr. Naomi S. Soderstrom of the University of Colorado, Denver and Dr. Christopher H. Stinson of the University of Texas-Austin. Special thanks to Thomas Brucker, Don Cram, Lynn McDown, Christal M. Hood, Sarah Jackson, Steve Sefcik, and participants of the 1995 BELL Conference for their help in preparing the case. The case is intended to serve as the basis for class discussion rather than an illustration of either effective or ineffective handling of an administrative situation. Copyright © 1998 World Resources Institute.

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THE BOEING COMPANY: ENVIRONMENTAL MITIGATION COSTS Boeing Company executives felt blindsided. After carefully analyzing where it should produce its new 777 jetliner, the company had decided to expand its existing aircraft production works at Everett, Washington. The decision brought immense relief to thousands of Boeings production workers in the Puget Sound region, and it represented an investment of hundreds of millions of dollars in the local economy. Despite all the economic benefits to the city and region, the City of Everett responded by assessing Boeing well over $50 million to mitigate the environmental and social impacts of the expansion. Now Boeing faced the additional puzzle of how to manage and account for the mitigation expenditures. Accounting standards offered little guidance because mitigation of this scope and magnitude had little precedent. Should the various outlays be accounted as assets or expenses? How should they be described in financial reports? What were the tax implications? Boeings financial, tax, and cost accounting groups were in a quandary and could not reach a consensus.

For more than a decade, WRI's Sustainable Enterprise Program (SEP) has harnessed the power of business to create profitable solutions to environment and development challenges. BELL, a project of SEP, is focused on working with managers and academics to make companies more competitive by approaching social and environmental challenges as unmet market needs that provide business growth opportunities through entrepreneurship, innovation, and organizational change. Permission to reprint this case is available at the BELL case store. Additional information on the Case Series, BELL, and WRI is available at: www.BELLinnovation.org.

The Boeing Company and the 777 In 1992, Boeing was one of the worlds largest aerospace firms with two main industry segments: Commercial Aircraft and Defense and Space. The Commercial Aircraft group developed, produced, and marketed jets principally for commercial airlines. The Defense and Space group conducted most of its work -- research, development, production, and support of military aircraft, space systems, and missile systems -- for the U.S. Government.

Boeings 1992 sales were up 3 percent from 1991 levels to $30.2 billion. Total assets were $18 billion in 1992, up from $14.6 billion in 1991. Nevertheless, in 1992, Boeings total stock market value was off 25 percent from 1991 levels. The equity markets were probably reacting to the fact that 1992 net income was $1.55 billion, down from $1.57 billion in 1991 (see Appendix A, Boeings 1991-1995 financial data). Boeings 1992 profits (and projected profits) were being challenged by a slump in the passenger-airline industry and increased competition from Airbus, the European commercial aircraft consortium. The Boeing 777 aircraft seats 375-400 passengers. It was designed to fill a commercial jet market segment between the 767-300 and 747-400 Boeing aircraft. None of Boeings existing facilities was sufficient to build the new aircraft. Several cities offered Boeing tax breaks and other incentives to lure the investments, or offered lower costs of permitting and construction or generally lower costs of doing business than Everett. However, Boeing ultimately decided to expand its existing facility at Everett in order to take advantage of existing infrastructure associated with production lines for its other planes. In addition, most of its skilled work force already lived nearby. Everett had eagerly supported Boeings previous investments there, and the company anticipated a similar reception for the 777 program. The City of Everett Everetts economy had long been tied closely to Boeings fortunes. The companys decision in the late 1960s to produce the 747 at Everett had heralded growth and prosperity for the quiet mill town, just 25 miles north of Seattle on the shores of Puget Sound. Rapid growth throughout the region in the 1970s and 1980s, however, brought sprawl, congestion, and pollution and threatened the areas natural beauty. Popular sentiment turned to controlling the effects of growth. In 1991, the state legislature passed carefully constructed legislation to manage growth and to create incentives for compliance. Passed just after the ballot defeat of Initiative 547, which had strong state controls and authority, the 1991 legislation attempted to achieve a balance that provided for bottom-up planning and timely dispute resolution. It also included enforcement provisions for local governments that did not comply with the law. At the time, there was considerable discussion about the proper state role in providing guidance to local governments. The compromise allowed the state to issue procedural criteria describing the planning elements that would meet the stated goals and requirements. It also allowed state agencies to challenge local development plans. Washingtons Environmental Policy Act Project developers (e.g., Boeing, with its Everett expansion) were required by law to forecast the environmental impacts imposed on a community by a new project prior to receiving community permission to proceed. Since the 1970s, federal, state, and local laws and regulations had required municipalities to ensure that such developments were consistent with environmental laws and regulations. The state Environmental Policy Act (SEPA) was the primary law affecting Boeings expansion at Paine Field. It required preparation of an environmental impact statement (EIS)1 for all proposed developments significantly affecting the quality of the environment. The expansion proposed by Boeing, representing one of the largest construction projects in the history of Washington state, clearly fell within SEPAs regulatory authority. EIS requirements ensured the disclosure and consideration of environmental impacts before any needed permits were issued (see Appendix B, the State Environmental Policy Act). 1 A draft environmental impact statement (EIS) is prepared and circulated to all interested persons for comment, following which the final environmental impact statement is prepared.

2 The Boeing Company

In compliance with SEPA, Boeing prepared an EIS identifying the significant environmental impacts associated with the expansion. This statement was used to negotiate the Mitigation Agreement between Boeing and the city. Because Boeings proposed expansion was entirely within the City of Everett, SEPA required Everett to estimate the social and environmental costs of Boeings expansion and to negotiate an agreement that compensated the community for these costs. However, the law provided little guidance to calculate the costs and did not prescribe compensation mechanisms. In the past, most communities had been willing to accept the proposition that private investment and employment would boost tax revenues, more than offsetting the social and environmental costs of growth. The states political climate in 1991 undermined this precedent and strengthened Everetts hand in the mitigation negotiation that followed Boeings 777 production siting decision. Mitigation Requirements The negotiated agreement required Boeing to provide general site-wide and area-specific mitigation and to mitigate off-site transportation and other employment-driven impacts. The specific issues described in the Mitigation Agreement are discussed below (see Appendix C, Introduction to the Agreement on Mitigation Costs Between Boeing Company and the City of Everett). General site-wide mitigation Everett detailed various restrictions and imperatives for the construction process. It required that Boeing control all forms of erosion at the site during and after construction, including removal of any standing surface water, covering temporary slopes, and limiting slope angles. Watering plans were to be implemented during dry weather to reduce dust. Destroyed wetlands had to be replaced at a ratio of three acres for every acre lost. For transportation impacts around the facility, Boeing was required to set up a complex system of services. It created transit centers for both public and dedicated service conveniently located near building and site entrances. Preferential routing and dedicated lanes and pull-offs would ease bus passage. Boeing was also required to designate five on-site transit/ride-share/van-pool coordinators to promote the Transportation Demand Management Program. Area-specific mitigation To minimize environmental damage on the site, Everett required Boeing to take precautions regarding vegetation, wetlands, and yews trees. Vegetation buffers were to be provided for all streams and wetlands. A wetland biologist was required on-site during all construction activities involving use of heavy equipment adjacent to sensitive areas. The site also contained groves of yews trees, which produce a substance with cancer-fighting properties. To protect this resource, Boeing was required to provide for collection and harvest of bark and needles for medical research and use and for replacement where harvest was unavoidable. Harvested material was to be made available to a medical or educational institution undertaking yew research. Mitigation of off-site transportation impacts The Mitigation Agreement detailed numerous transportation improvements to offset increased traffic around the site, with a total cost of $47.46 million. Miscellaneous transportation mitigation projects included widening roads, construction of new interchange ramps on Interstate 5, continuous High Occupancy Vehicle lanes from the Boeing site to Interstate 5, and improvements to the nearby Mukilteo Ferry. Boeing agreed to compensate Everett partially for these improvements, with annual payments of

The Boeing Company 3

$20 million, $10 million, $10 million, and $3.06 million spread over the years 1991-1994. The company was also required to purchase approximately 80 vans and 10 transit buses at an estimated cost of $4.4 million. The vehicles were to be owned by Boeing but operated by local transit authorities. Mitigation of other employment-driven impacts To help redress economic problems faced by the community, Boeing agreed to contribute $25,000 to a campaign to support passage of a tax levy on real property in the surrounding Snohomish County, the funds from which would support low-income housing not used by Boeing employees. In order to develop more low-income housing, Boeing also agreed to invest $2 million in the Local Initiative Support Corporation or in an investment tax credit program that served such a cause. Boeing additionally agreed to lobby to include housing impact language in the Growth Management Act which the legislature was then considering. Further, the company agreed to construct four ballfields for the citys permanent use. Summary of minimum mitigation costs The costs for the general site-wide and area-specific mitigation were not specifically stated. However, the total for off-site transportation impact mitigation ranged from $188.25 million to $188.35 million, of which Boeings share was $47.46 million. On-site mitigation would drive the overall cost much higher. Boeings Reaction Throughout and after the mitigation negotiation, several communities continued to offer financial incentives to induce Boeing to relocate its Everett facilities. The costs of delay caused by reconsidering the siting decision and negotiating with another community would have been so high that Boeing stayed the course. After the agreement was signed, Boeing Chairman Frank Shrontz was quite angry about the $50 million in mitigation costs associated with [Boeings] Paine Field expansion [and] told the Seattle Rotary Club the Puget Sound area was not the best in the world to do business. Shortly afterward, Shrontz all but said the next new planepotentially an 800-seat behemothwould be built elsewhere.2 Several Boeing representatives were annoyed that Everett gave concessions to a new hotel built in Everett shortly after Boeing began construction on its (then approved) expansion. Accounting for the Mitigation Requirements Faced with these mitigation costs, Boeing needed to determine how to account for and disclose them. Boeings external auditor wrote: generally accepted accounting principles have not specifically addressed such mitigation costs. These costs have not tended to be material and thus there has been insufficient controversy to warrant the attention of accounting standard-setting bodies (see Appendix D). Thus Boeing had unusual discretion in deciding how to treat these costs. The central debate revolved around whether to capitalize the costs or to expense them, based on competing interpretations of generally accepted accounting principles and standards. Boeings management accountants argued that the company should largely expense the costs. Environmental mitigation costs were not a normal and predictable component of a capital assets costs, they did not add any measurable value to the related capital assets, and, further, it was Boeings established practice to expense such costs (see Appendix E, White Paper from Boeings management accounting group). The external auditor argued that because the mitigation costs were directly related to the ability to proceed with the project, they should be considered a direct cost of the project and should be capitalized. This

2 Seattle Times, 1 March 1993, pp. F1, F6.


treatment would more closely reflect Boeings total investment in the asset (see Appendix D). Further complicating matters were the tax considerations involved. Based on their interpretation of the tax law, Boeings tax group argued that because the costs were capital in nature and because Boeing expected to receive economic benefits in excess of those that would inure to the general public, Boeing was required to capitalize the mitigation costs (see Appendix F). STUDY QUESTIONS The $50 million (or more) in mitigation costs have to be accounted for by Boeing for financial reporting, internal managerial accounting, and federal taxation. 1. Explain the different possible accounting treatments for the mitigation costs imposed by the City of Everett and recommend one with justifications. Are these costs material for a company of Boeings size? How does the treatment differ (if it does) for financial, managerial, and tax accounting purposes? 2. Where do accounting standards or regulatory requirements dictate specific accounting treatments, and where does Boeing have flexibility in its accounting decisions? What are the management implications of these latter decisions? 3. Are these mitigation costs reasonable or excessive? How is fair or reasonable cost determined? Why were all firms moving to Everett (e.g., the new hotel) not charged comparable amounts? What alternatives does Boeing have to paying these costs? 4. Suppose you are an analyst evaluating Boeing and another aerospace manufacturer for purposes of making an equity investment. Further, assume that Boeing capitalized these expenses while another company treated similar expenses as current charges. Would the financial fundamentals of the companies be comparable? What adjustments, if any, would you make so that they are comparable?


Appendix A


Appendix B The Washington State Environmental Policy Act The Washington State Environmental Policy Act (SEPA) is closely patterned on the National Environmental Policy Act (NEPA). When a proposed development significantly affecting the quality of the environment... is proposed, the statute requires the preparation of an environmental impact statement (EIS)3, that identifies the significant environmental impacts that will be caused by the proposal The requirement for the EIS is to ensure that one of the fundamental goals of SEPA -- the disclosure and consideration of environmental values -- are identified before any needed permits are issued. SEPA states, in part, that its purpose is to:

(a) Foster and promote the general welfare; (b) to create and maintain conditions under which man and nature can exist in productive harmony; and (c) fulfill the social, economic, and other requirements of present and future generations in Washington citizens.4

An expansion such as that proposed by Boeing:

represents one of the largest construction projects in the history of Washington state The effect on the economy of Everett, the surrounding areas and, indeed, the entire state will be substantial and many comments were received during the SEPA comment period urging the City just get on with it. However, both SEPA and good public policy require that as the decision makers consider permitting such a massive undertaking, they do so fully cognizant of the environmental implications of the activity. Therefore, the impacts associated with the project have been carefully analyzed in the EIS.5

Once an EIS was prepared, as Boeing did for this massive project, the City of Everett had how to deal with those identified impacts. Under SEPA the City had the power to condition or deny... Boeings needed permits. In this case the City approved Boeings project, but imposed conditions on the Company that would ameliorate or mitigate the environmental impacts that the expansion would cause. Mitigation is defined as: 3 A draft environmental statement (DEIS) is prepared and circulated to all interested persons who can comment on the DEIS. following which a final environmental statement (FEIS) is prepared. It is this FEIS that is the basis for addressing the environmental impacts of the proposed project. 4 Revised Code of Washington (RCW) 43.2 IC.020(1) 5 The Decision of the City of Everett, Appendix A. p.7.


(1) Avoiding the impact altogether by not taking a certain action or parts of any action; (2) Minimizing impacts by limiting the degree or magnitude of the action and its implementation; by using appropriate technology, or by taking affirmative steps to avoid or reduce impacts; (3) Rectifying the impact by repairing, rehabilitating, or restoring the affected environment; (4) Reducing or eliminating the impact over time by preservation and maintenance operations during the life of the action; (5) Compensating for the impact by replacing, enhancing, or providing substitute resources or environments; and/or (6) Monitoring the impact and taking appropriate corrective measures.6

Boeing, then, was undertaking a massive building project that caused widespread environmental impacts. The City of Everett was complying with the stated public policy of Washington State when it required the Company to pay for lessening these impacts. State law left the City with no choice but to see that Boeing paid to mitigate the impacts it would cause. How Everett addressed the impacts identified in the EIS is detailed in Appendix A of the mitigation agreement.

6 Washington Administrative Code (WAC) 197-11-768


Appendix C Introduction to the Agreement on Mitigation Costs Between Boeing Company and the City of Everett

July 3, 1991

THE DECISION OF THE CITY OF EVERETT Imposing Mitigation Pursuant to SEPA

on the Expansion of the Boeing/Everett Airplane Manufacturing Facility

I. DECISION ISSUED RESPONSIVE TO SEPA REQUIREMENTS This Decision Document has been prepared and is issued by the City of Everetts Director of Planning and Community Development who is identified under Everett Ordinance 1348-87 as the Responsible Official designated to exercise the Citys substantive SEPA authority. This Document has been prepared responsive to the requirements of RCW 43.21C.060, WAC 197-11-660, and Everett Ordinance 1348-87. The adverse environmental impacts which this Document addresses were identified in the DEIS on the Boeing proposal issued on April 15, 1991, as updated, expanded and clarified in the FEIS issued on June 24, 1991. These impacts, in the judgment of the Responsible Official, did not warrant denial of the proposal under WAC 197-11-660(2) but did provide the basis for the mitigating measures set forth in Sections V through VII. SEPA and the City of Everetts exercise of its SEPA authority are supplemental to other government regulations designed and enforced to control the environmental impacts of a development and its ongoing operations. The Citys SEPA Ordinance 1348-87 states: The policies, procedures and goals set forth in this ordinance are supplementary to those set forth in existing authorizations of all branches of government of this State, including State agencies, municipal and public corporations, and counties. (Section VIIB.1) Implementation of the Boeing Master Development Plan (MDP), as identified in the EIS, is subject to a number of these controls which are recognized and evaluated in the Citys determination of reasonable and appropriate mitigating measures. These existing regulations and controls are identified in the following section (Section II - Permits and Regulations which are Applicable to Mitigation) of this Document. Notwithstanding any language in this Document, it shall be the responsibility of Boeing to comply with all other applicable regulations, ordinances and statutes. This Document incorporates all of the conditions and mitigating measures that the City of Everett has determined it will impose under its SEPA substantive authority on the Boeing expansion proposal as that proposal is specifically identified and described in Section 2 of the FEIS. All permits and approvals necessary for the implementation of the Boeing proposal that are required by the City of Everett will be modified in relevant part in conformance with the conditions and mitigating measures included in this Document. No such individual permit or approval shall alter or modify these conditions and mitigating measures in any material respect except as provided in this Document. All minor modifications deemed necessary at time of


permit issuance shall be approved by the Responsible Official. Pursuant to RCW 43.21C.075, WAC 197-11-680 and Everett Ordinance 1348-87, the Citys exercise of its substantive SEPA authority as set forth in this Decision Document is subject to appeal pursuant to the procedures for appeal contained in Everett Ordinance 1348-87.

1. Aggrieved parties will have ten (10) calendar days from the date of issuance of this Decision Document to file an appeal to the Everett City Council.

2. The fee for an appea1 of the Responsible Officials decision is $100, payable to the

City of Everett and delivered to the City Clerk, together with the written appeal in accordance with Section VII-C of Ordinance 1348-87.

IL FEDERAL, STATE OR LOCAL REQUIREMENTS WHICH WILL MITIGATE IDENTIFIED IMPACTS In addition to the State Environmental Policy Act, its state regulations, and local implementing ordinance, a number of federal, state and local statutes and regulations will affect the development of the Boeing-Everett expansion (Expansion). Such statutes and regulations will serve to limit or otherwise control many of the environmental impacts of the Expansion and, thus, will mitigate those impacts (SEPA Guidelines, 197-l1-660(i)(e)). This statutory mitigation of Expansion impacts is summarized below by category: A. AIR Air emissions from the Expansion must comply with applicable federal, state and local requirements. These regulations require implementation of the best available control technology or the lowest achievable emission rate, as appropriate.

1. Federal: Environmental Protection Agency (EPA): State and local permits must implement the requirements of the Federal Clean Air Act, 77 Stat. 392, as amended.

2. State: Clean Air Act of 1991 - Ch. 199; Washington State Department of Ecology

(Ecology): Prevention of Significant Deterioration Permit (PSD) WAC 173-403-080.

3. Local: Puget Sound Air Pollution Control Agency (PSAPCA): Notice of construction and application for approval (NOC application) PSAPCA Regulation 1, Article 6.

B. EARTH Soil erosion on slopes during and after construction and impacts of fill above grade will be mitigated in part by compliance with City of Everett (City) requirements for grading, excavating, erosion control and setbacks. See Design and Construction Standards and Specifications, issued pursuant to Ordinance No. 898-82 and as revised March 27, 1991.


C. SURFACE WATER Within the Northeast Expansion Area as described in the FEIS, control measures (including oil-water separators and biofilters) must be employed to provide adequate surface water treatment prior to offsite discharge in accordance with the City requirements. See Everett Municipal Code, Chapter 14.28. D. PLANTS, ANIMALS AND WETLANDS Federal and state agencies will regulate elements of the Expansion program that affect certain streams and wetlands. In addition, in order to fill certain wetlands on the Expansion site, a wetland mitigation plan must be provided consistent with requirements of Section 37 of the Citys Zoning Code. The mitigation plan must include monitoring and contingency provisions.

1. Federal: U. S. Army Corps of Engineeers 404 Permits for wetlands and stream modifications, 40 CFR Part 230.

2. State: Washington Department of Fisheries, Hydraulic Project Approvals for work in

streams and wetlands, Chapter 220-110 WAC.

3. Local: City of Everett, Requirements for Wetlands Protection and Mitigation, Everett Zoning Code, Section 37.

E. NOISE Noise levels will be regulated by state and local noise ordinances.

1. State: Department of Ecology, Maximum Permissible Environmental Noise Levels, Chanter 173-60 WAC; School Site Approval Regulations, WAC 248-64-240.

2. Local: Snohomish County Code, Chapter 10.01; City of Everett, Ordinance 690-80;

City of Mukilteo, Ordinance No. 655.

F. HAZARDOUS MATERIALS Storage, handling and disposal of hazardous materials and hazardous wastes are regulated by a number of federal, state and local laws, including:

1. Federal Regulations:

(a) The Resource Conservation and Recovery Act of 1976 (RCRA), 40 CFR 262-264, which establishes operating, maintenance and safety standards applicable to generators of hazardous wastes and to owners and operators of hazardous waste treatment, storage and disposal facilities.


(b) The Hazardous Materials Transportation Act, 40 CFR 171-177, Subchapter C, which governs the transportation of hazardous materials. The Act lists and classifies hazardous materials for purposes of transportation; provides requirement for labeling and otherwise identifying transported materials; and provides packing requirements.

(c) The Occupational Safety and Health Act (OSHA), 29 CFR 1910, which establishes

safety and health standards for the workplace.

(d) The Superfund Amendments and Reauthorization Act, Title III 40 CFR 355-372, which establishes procedures whereby communities (i) receive information on hazardous materials used in those communities to minimize danger of major releases that might be caused in the event of an emergency and (ii) receive information about chemical releases into the environment.

(e) The Toxic Substances Control Act, 40 CFR 763, which regulates the use of and

exposure to raw industrial chemicals (such as asbestos) that fall outside the jurisdiction of other environmental laws.

(f) The Clean Water Act, 40 CFR 100-143, which establishes health-based standards for

protection of aquatic life and establishes acceptance methods and materials for sampling and testing waters.

2. State Regulations:

(a) The Hazardous Waste Management Act 70.95 RCW, and regulations in Chapter 173-303 WAC, which implement RCRA and are in some respects more stringent than the federal regulations.

(b) The Model Toxics Control Act 70.105 RCW, and regulations in Chapter 173-340

WAC, which establish the states authority to direct or perform cleanup of hazardous waste sites but will apply to the Expansion only if spills or releases of hazardous substances result in contamination of the environment.

(c) The Washington Industrial Safety and Health Act, Chapter 49.17 RCW, which

implements the federal OSHA and is, in some respects, more stringent than the federal regulations.

(d) Water Quality Standards for Surface Waters 90.48 RCW and regulations in Chapter

173-201 WAC, which establish water quality standards that are essentially parallel to federal standards.

(e) The Waste Reduction Act, Chapter 70.95C RCW, which requires companies that

generate over 2,640 pounds of hazardous waste per year and companies that use hazardous substances to prepare hazardous substance and waste reduction plans.


3. Local Regulations:

The Wastewater Pretreatment Standards and permit requirements of the City of Everett, Ordinance No. 1308-86, which establish waste water pretreatment standards that apply to all discharges to the City of Everett sanitary sewage system.

G. TRANSPORTATION Management of the transportation of employees to and from the Expansion site must conform to the requirements of SSHB No. 1671, which relates to highway access control and transportation demand management. SSHB 1671 provides that major employers must follow transportation demand management guidelines to be established by the City of Everett in a commute trip reduction plan prepared by the employer. H. GENERAL

1. Everett Zoning Code, Title 19 of the Everett Municipal Code:

a. Sections 26.01 and 27.01 contain use standards for the M-1 and M-2 zones.

b. Section 37 sets forth regulations for development in environmentally sensitive areas.

2. Everett Building Code, Title 16 of the Everett Municipal Code.

3. Ordinance 555-78, as amended, requires all developing property owners to improve

their abutting public road right-of-way in accordance with City standards. All roadways abutting the Boeing site may be subject to this requirement, including Seaway Boulevard. In the event that a roadway is scheduled for improvement, the applicant shall dedicate the required right-of-way, widen and install curb, gutter and sidewalks in accordance with City Standards, or bond for the improvements.

III. INTRODUCTION TO MITIGATION IMPOSED BY RESPONSIBLE OFFICIAL The Boeing expansion proposal at Paine Field represents one of the largest construction projects in the history of Washington state. The effect on the economy of Everett, the surrounding areas and, indeed, the entire state will be substantial and many comments were received during the SEPA comment period urging the City to just get on with it. However, both SEPA and good public policy require that as the decision makers consider permitting such a massive undertaking, they do so fully cognizant of the environmental implications of the activity. Therefore, the impacts associated with the project have been carefully analyzed in the EIS. The impacts analyzed in the EIS, and the required mitigation measures contained in this Document, are based on assumptions and expectations as to future activity. An exceptionally


large and complicated project such as the Boeing expansion, which is to be undertaken over several years, will test the limits of our ability to predict with precision what will result as the project is built. Such a project will also test use of the SEPA process to measure impacts and prescribe mitigation measures. While some of the impacts addressed in the EIS are relatively predictable, and appropriate mitigation can be readily ascertained, others such as transportation are more speculative in nature. For instance, we cannot predict with certainty how people will respond to new requirements for transportation demand management -- ride sharing, buses and van pooling; it is not a simple task to predict with precision the outcome of efforts to modify peoples behavior in terms of their preferred mode of transportation and their commute to work. Additionally, there are many other variables which must be accounted for in the measurement of significant transportation impacts and selection of mitigation, such as future development activities in the vicinity of the project and availability of federal, state and local funding. Uncertainty is not limited to transportation impacts. Many other areas of impact and necessary mitigation are equally imprecise. Nevertheless, the responsibility of the City of Everett in the conduct of this environmental review and resulting mitigation decision is to evaluate the impacts, disclose these impacts to decision makers and the public, and prescribe appropriate mitigation measures. These variables make the SEPA mitigation process at best a reasonable prediction of and response to future events. SEPA was intended by the legislature to ensure a stewardship of the environment, to provide a disclosure process, and to ensure that environmental considerations are weighed along with economic and technical considerations in arriving at a final decision on a proposal. It does not guarantee nor require that all adverse environmental impacts be mitigated. However, decision makers and the public can expect that the requirements which are contained in this Decision document will be implemented. The mitigation process contained herein is designed to be dynamic, providing for flexibility to meet changed circumstances where appropriate. The exercise of SEPAs substantive authority incorporates a balancing of concern for. the identified environmental impacts, economic realities and technical considerations. Simply stated, the economic realities are that Boeing is the single largest private employer in the Northwest economy. Regarding technical considerations, the project being reviewed involves operations where quality controls are critical. The manufacturing of high technology products such as aircraft is not forgiving of poor quality. The public and the aircraft are potentially at risk if technical considerations are not given due regard. The test for making this difficult balancing of considerations, both as a legal constraint under SEPA and as a check on any public officials exercise of governmental powers, is one of reasonableness. In this context, reasonable requires an assessment of both what is fair and what is practical. Would it be reasonable to deny the economic benefits resulting from the proposed expansion? Would it be reasonable to permit degradation of the physical environment where analysis has shown these impacts could be avoided? Would it be reasonable to impose extensive


mitigation to improve conditions that are based solely on tentative forecasts and a complex interrelationship of assumptions and factors which may not play out for years? Would it be reasonable to rely on existing frameworks of federal, state and local regulations and mandates? Finding the reasonable accommodation of competing policies and concerns is made even more difficult given the City of Everetts dynamic landscape as a high growth area. The cycles of the local economy have proven to be fragile and vulnerable to regional, national and even international shifts in economic winds. No less fragile and vulnerable is the unique environment of the Northwest. In this context, the input of public concerns and the expertise of public agencies are critical dimensions in achieving a reasonable balance. Therefore, a painstaking effort to prepare a comprehensive EIS was made by the City of Everett. Circulation of the Draft went well beyond requirements and the comments were regarded as an important part of the decision-making process. The decision and the mitigation measures prescribed herein reflect a balanced approach intended to err on the side of protecting fragile elements of the environment which might be irrevocably harmed, while recognizing the importance of the Expansion not just to the City of Everett but to the state and the nation, and further appreciating the important technical considerations which are unique to this proposal.

IV. IMPLEMENTATION OF DECISION

In accordance with WAC 197-11-660, Boeing may apply for permits to expand its facility. Permits issued by the City shall be subject to conditions which implement the mitigation measures set forth in this Document and contain such measures otherwise required by City ordinances and regulations. Certain of these mitigation measures contain elements and requirements which will need to be more fully developed as permit applications are reviewed and/or will require monitoring of either the impacts as they occur or the mitigation as it occurs. Still other mitigation measures may need to be revised as we learn of new circumstances. The need for flexibility is a key determinant in the structure of this mitigation package. The process incorporated to implement this decision respects the need to maintain an ongoing relationship with The Boeing Company and various parties impacted by this project. In order to implement a mitigation strategy which incorporates flexibility, a management structure is required to periodically review portions of the mitigation program and make recommendations and alterations as appropriate in accordance with the terms and conditions set forth in this Document. Such a management structure is set forth in this Document under Section VII E. The Responsible Official may make alterations or adjustments to this mitigation package only if such a revision is provided for in this Document; or if it is deemed by the Official to be consistent with the intent of the mitigation requirements; or if the change is a matter of an interlocal agreement or contract signed in accordance with this Document and consistent with its


terms, and such change or alteration is agreed to by the other parties to such interlocal agreement or contract. However, no such revision in the mitigation requirements shall require further financial obligations on the part of Boeing unless such a revision is the result of a change in the proposal, or unless otherwise required by law, or agreed to voluntarily by Boeing.


Appendix D Deloitte & Touche report (Boeing Proprietary) October 21, 1991 Mr. Thomas M. Budinich Vice President/Controller The Boeing Company Seattle, Washington Dear Mr. Budinich: We have been engaged to report on the appropriate application of generally accepted accounting principles to the specific mitigation transaction described below. This letter is being issued to The Boeing Company (the Company) for assistance in evaluating accounting principles for the described specific transaction. DESCRIPTION OF TRANSACTION The facts, circumstances and assumptions relevant to the specific transaction as provided to us by you are as follows: The City of Everett has charged The Boeing Company certain mitigation costs as a condition of the Companys obtaining building and construction permits to expand the Everett plant for the 777 program. The Citys source for this authority is the State Environmental Policy Act (SEPA). Under the Decision Document issued by the City of Everett, Boeing is being required to incur costs in the form of construction permit fees to mitigate:

1) the impact of the influx of additional employees and the related increase in population on transportation facilities (widening of roads, providing buses and vans, encouraging and facilitating employee use of public transportation facilities),

2) the impact on housing and public services. Boeing is required to invest $2 million into a low

income housing tax credit investment program. Also, the Company will need to maintain four on-site ball fields and to maintain the current ratio of its on-site firefighter/ security personnel to employees, and

3) environmental impacts of the site itself (soil erosion, moving of Yew trees, landscaping, retaining

of wildlife corridors, etc). The most significant elements of the mitigation costs involve the costs for mitigation of the environmental impacts (for which no estimated costs were included in the Decision Document), and $48 million to be expended on traffic improvements and S2 million for low income housing. The assessment of costs that deal with transportation improvements and low income housing is to address the effects of the expected influx of significant additional employees on local and regional transportation and housing. Thus, the payment of these mitigation costs is a condition of obtaining the necessary construction permits. The City of Everett has the ability to enforce payment of these costs by denying or withdrawing


the necessary permits. Although specific projects to be financed with the monies have been tentatively identified, they arc subject to change. The amount due is to be paid and is expected to be spent primarily over the construction period. APPROPRIATE ACCOUNTING TREATMENT Based on our research and in consultation with the Deloitte & Touche National Office (Accounting Research Department), generally accepted accounting principles have not specifically addressed such mitigation costs. These costs have not tended to be material and thus there has been insufficient controversy to warrant the attention of accounting standards-setting bodies. The issue was on the Emerging Issues Task Force agenda but was removed. As with many accounting issues, it must be addressed on a conceptual basis. The primary accounting issue is whether the mitigation costs should be expensed or capitalized. And, if the costs are capitalized, to which assets they should be allocated and the appropriate amortization period. A key question in determining if the costs qualify as assets is whether these costs should be considered independent of or in conjunction with the entire project. Financial Accounting Standards Board Statement of Financial Accounting Standards (FAS) No. 34, Capitalization of Interest provides guidance on this issue. It states that costs to be capitalized include costs necessarily incurred to bring [an asset] to the condition and location necessary for its intended use, the objective of which is to obtain a measure of acquisition cost that more closely reflects the enterprises total investment in the asset and... to charge a cost that relates to the acquisition of a resource that will benefit future periods against the revenues of the period. In that Statement, the Board concluded that the amount of cost to be capitalized should be the amount that theoretically could have been avoided during the acquisition period if expenditures for the asset had not been made... That cause-and-effect relationship between the investment in the asset and the incurrence of [the] cost makes [the] cost analogous to a direct cost in those circumstances. Under the above guidance of FAS No. 34, the mitigation costs could be considered to be a part of the entire project since they are essentially permit fees assessed by the City of Everett as a condition of proceeding with the expansion project. They arc a result of the Companys decision to expand the Everett facility and could only have been avoided by not proceeding with the plant expansion. As the costs are directly related to the ability to proceed with the project, they could be considered a direct cost of the project. Consequently, these costs should be capitalized since they are part of the project, and are not a separate and distinct asset. Another test of capitalization is to analyze whether a cost qualifies as an asset under definitions and requirements of generally accepted accounting principles. Based on our conclusion above, any such analysis should be performed on the project as a whole, without separately analyzing the mitigation costs. The Financial Accounting Standards Board Statement of Concepts No. 6, Elements of Financial Statements, defines assets as probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Another requirement for capitalization is that the costs be recoverable. Clearly, the plant expansion will provide future economic benefits and will be controlled by the Company. The costs are expected to be recovered through future cash flows, rather than the eventual sale of the facilities. The costs are expected to be recovered or management would not have proceeded with the project. One argument against capitalization of the mitigation costs has been that the resulting recorded value of


the project may exceed its market value. This position is speculative in assuming that an appraiser would not consider the mitigation costs in evaluating the project. Also, generally accepted accounting principles do not require that fixed assets held for production be recorded at the lower of cost or market unless there is a permanent impairment of value as a result of a specific event subsequent to acquisition. Thus, we do not believe that this argument has merit. In conclusion, we believe that the mitigation costs (except for buses/vans, ball fields, and on-site firefighter/security personnel -- see the Other Costs section below) should be capitalized and allocated to fixed asset accounts such as buildings, building equipment, and land improvements and be amortized over their respective lives. One could also justify capitalization to equipment (personal property), but this may not be administratively practical. The Company should use a rational and systematic basis for determining the proper allocation methodology. Other costs: The $4.4 million for buses/vans which Boeing will own and the City will operate could be separately capitalized and amortized over their useful lives. It would not appear appropriate to allocate the buses/vans to buildings since their related costs would remain on Boeings books after the assets were no longer in use. As a result of the construction, some of the four existing ball fields may be razed. The Decision Document requires that they be replaced. When the existing ball fields were constructed, Boeing capitalized them as land improvements. Since the new ball fields will be on Boeing land and will provide future benefit to employees, past capitalization policies appear appropriate. Because the costs of maintaining the specified proportion of on-site firefighter/security personnel are variable and indefinite, the Companys current practice of expensing these costs as period costs appears appropriate. Timing of recording the liability: The $43.1 million (or $48 million with interest compounded annually at 7.5%) for transportation mitigation is payable over four years ($20 million, $10 million, $10 million, and $3.1 million on Sept. 1, 1991, 1992, 1993 and 1994, respectively). An issue is whether the full amount should be treated as a purchase commitment and be recorded upon payment, or be recorded as a liability as of the date the Decision Document was issued (July 3, 1991). With a purchase commitment, an entity will not obtain the asset until some future point. In this instance, the Company has an immediate benefit, the right to proceed with the construction. Also, because the Company has the ability and intent to undertake the entire project, and since the mitigation costs are fixed and determinable, it would be proper accounting to record the full liability as of the Decision Document date. CONCLUDING COMMENTS In our opinion, your conclusion to capitalize and amortize the mitigation costs (excluding costs of on-site firefighter/security personnel) is in compliance with generally accepted accounting principles. Our judgment on the appropriate application of generally accepted accounting principles for the described specific transaction is based solely on the facts provided to us as described above; should these facts and circumstances differ, our conclusion may change.


Appendix E White Paper from Boeings Management Accounting Group (Boeing Proprietary)

White Paper Accounting for Environmental Mitigation Costs

Environmental mitigation costs (see attached exhibits 1 and 2) are incurred as a result of SEPA (State Environmental Protection Act) regulations. In addition to SEPA regulations, there are numerous other regulations and requirements (e.g., permit regulations, zoning code decisions, city policies, OSHA, EPA, etc.) which must be met and which serve as a precondition to obtaining the necessary permits and approvals. The costs of complying with such regulations and requirements may be capitalized or expensed in accordance with the basic nature of the cost incurred. It is each resulting individual cost, not the regulations which caused the cost, that is relevant to the cost accounting decision (i.e., an external requirement to relocate Yew trees does not change the basic nature of the costs involved (landscaping expense). Accordingly, to the extent that the environmental mitigation agreement requires study efforts, such costs will normally be expensed. To the extent that the environmental mitigation agreement requires asset modifications and land improvements, such costs will normally be capitalized. To the extent that the environmental mitigation agreement requires payments to local authorities for traffic mitigation (which does not add value to existing Boeing property), such costs will normally be expensed. The decision to expense rather than capitalize environmental mitigation payments to local authorities is predicated on the following determinations:

-- Environmental mitigation payments to local authorities are not a normal and predictable component of a capital assets cost (see attached exhibit 3).

-- Environmental mitigation payments to local authorities do not add any measurable value to

the related capital assets.

Such costs primarily concern occupancy/operational considerations on both regional and local levels (i.e., transportation and housing impacts). The benefits of such mitigation are remote and do not add to the intrinsic value of Boeing capital assets.

-- A primary objective of Boeings capitalization practices is to ensure consistency in

recorded asset values. The fact that environmental mitigation payments to local authorities may be considered a precondition to obtaining permits and approvals cannot be the only criterion for capitalization. It is Boeings established practice to expense other but for type costs such as preliminary design, plant rearrangement, extraordinary rework, etc.

-- Expense treatment is 1) consistent with prior practices (e.g., Renton park improvements), 2) consistent with the treatment of other such costs which are incurred incidental to the acquisition of capital assets (e.g., preliminary design) and 3) consistent with the treatment of taxes of which environmental mitigation payments are provided in lieu of (see attached exhibit 4).

The tax laws and related cases which have been cited in support of the tax deductibility analysis are not necessarily relevant to the Cost Accounting decision. The tax case regarding the decision


that mitigation impact fees incurred by a real estate developer be capitalized and deducted pro rata as each house is sold appears to deal more with the determination of a direct inventory cost rather than the determination of a general purpose capital asset cost. In any event, tax laws do not necessarily have to agree with sound Financial and Cost Accounting principles (especially where revenue enhancement/socio-economics factors are involved). In addition, the dollar magnitude of the Everett mitigation requirements should not be an overriding consideration. If the costs are recognized as actions required by the mitigation agreement are taken and payments to the city are made, then the materiality of these costs is diminished due to the time phasing of the cash expenditures over a four year period. The determination set forth above is considered consistent with Boeings existing capitalization policy (Corporate Finance Instruction I-5.1) and its fundamental purpose to ensure consistency in recorded asset values. CFI I-5.1 is intended in most circumstances to be applicable for both financial statement and government cost accounting purposes. As an emerging industrywide issue, we will continue to work with the accounting profession and industry to assess whether future changes in this policy are warranted. Exhibit 1

EVERETT MITIGATION REQUIREMENTS OFF-SITE IMPACT SUMMARY

Transit, Ridesharing and Demand Management

80 vans, 10 buses, 300-400 park and ride spaces, 1 transit/TDM program coordinator, etc.

$6.15Transportation

Additions and improvements to local and regional street lanes, HOV (High Occupancy Vehicle) lanes, intersections, interchange and approach ramps. Mukilteo Ferry improvements, etc. 41.31

Housing Invest in low income housing program, contribute to campaign to support passage of real property tax levy to support housing initiatives, etc. 2.03

TOTAL BOEING SHARE $49.49

TOTAL ESTIMATED COST $188.35

BALANCE TO STATE AND LOCAL

GOVERNMENT $138.36


Exhibit 2

EVERETT MITIGATION REQUIREMENTS ON-SITE IMPACT SUMMARY

CONSTRUCTION Erosion control and soil preservation measures affecting

earthwork (e.g., temporary sedimentation ponds, silt fences reseeding, watering program to reduce dust emissions).

ENVIRONMENTALLY SENSITIVE AREAS

Creation/relocation of wetlands, streams, native vegetation buffer zones, wildlife corridors; collection, harvesting and relocation of Yew Groves and Trees, etc.

TRANSPORTATION Traffic flow improvement measures, additional parking spaces, bus/van pick-up and drop-off centers, etc.

LANDSCAPING Plant locations, pedestrian pathway and irrigation system requirements, etc.

SURFACE WATER Drainage and water quality requirements (e.g., detention systems, vegetated swales to treat stormwater runoff).

FACILITY OPERATION Fueling area: Develop and implement fuel spill prevention measures. Noise: Develop and implement excessive noise prevention measures.

HOUSING Implement employment practices which maximize local hirings. Assist in developing and promote a state housing impact assistance program.

PUBLIC SERVICES Recreation: Provide four on-site ballfields to reduce demand on city ballfields. Emergency services: Maintain same ratio of fire fighters and security officers to employees as currently exists (estimated to require an additional 18 firefighters and 13.5 security officers).


Exhibit 3 (EXCERPTS PROM EVERETT DECISION DOCUMENT (DATED JULY 3, 1991) ENVIRONMENTAL MITIGATION PAYMENTS TO LOCAL AUTHORITIES ARE NOT A NORMAL AND PREDICTADLE COMPONENT OP A CAPITAL ASSETS COST. The exercise of SEPAs substantive authority incorporates a balancing of concern for the identified environmental impacts, economic realities and technical considerations. (ref. page 8 of Decision Document; Note disparities between 1978 Everett, 1991 Everett and Spokane mitigation agreements.) Uncertainty is not limited to transportation impacts. Many other areas of impact and necessary mitigation are equally imprecise. (ref. page 7 of Decision Document) Here (i.e., employment driven impacts), are identified and quantified by making assumptions concerning the relevance of historical data, predicted behavioral patterns, and the presumed actions of the public sector regarding budget priorities and policies. These are hardly matters of precise science and unfailing formulas. (ref. page 43 of Decision Document) The funds (i.e., transportation mitigation monies) are not specifically dedicated toward projects, but rather pledged to be spent for mitigation which includes a number of projects as mitigation options. The commitment is that mitigation funds will be spent for mitigation of Boeing-related impacts. (ref. page 35 of Decision Document) Exhibit 4 (EXCERPTS PROM EVERETT DECISION DOCUMENT (DATED JULY 3, 1991) ENVIRONMENTAL MITIGATION PAYMENTS TO LOCAL AUTHORITIES REPRESENT PAYMENTS IN LIEU OF TAXES. The EIS presents an approach to funding of public services which rely on a tax revenue/expenditure comparison. This decision document employs that alternative for mitigation of public service impacts. Implicit in this decision is the opportunity for local and state governments to make further decisions as to budget priorities, policies, and expenditures of revenues. (ref. page 43 of Decision Document; emphasis added) The mitigation decision respects the difficulty inherent in finding equity in the state and local government tax structure to fund services. The decision relies heavily on local governments working with the state to balance impacts and tax revenues. (ref. page 43 of Decision Document; emphasis added).



Appendix F Overheads from internal presentations by Boeings Tax Group INTERPRETATION OF THE TAX LAW Charitable Contributions

• A charitable contribution is a contribution or gift made for exclusively public purposes in which the taxpayer does not expect any economics benefits in excess of those that would inure to the general public.

Involuntary Payments • A taxpayer must capitalize costs:

o even though the expenditure was involuntary, and o Even though the expenditure was for something that is not a direct part of the

taxpayers productive business Mitigation Payments

• Impact fees, which were required for the approval and recordation of plants owned by a real estate developer, should be capitalized and deducted pro rata as each house is sold

CAPITAL EXPENDITURES FOR TAX PURPOSES Any amounts paid out for new building for permanent improvements or betterments made to increase the value of any property are not deductible in the current period and are capital in nature. Capital expenditures are costs of acquisition construction, erection of buildings, machinery and similar property having a useful life substantially beyond the taxable year. TREATMENT OF MITIGATION COSTS FOR TAX

• The Boeing Company will receive economic benefits in excess of the general public (Approved Environmental Impact Statement). Therefore, not a charitable contribution.

• Boeings expenditures are capital in nature even though no tangible property interest is acquired in the public facilities or structures

• Boeing must capitalize mitigation costs and can recover the costs through depreciation and/or amortization deductions for the costs allocable to assets other than land.

TAX ACCOUNTING FOR EVERETT MITIGATION COSTS Relevant Facts:

• Mitigation costs are assessed by government agencies to offset adverse environmental impacts

• Generally imposed as a precondition to obtaining required permits and/or approvals

World Resources InstituteMitigation of off-site transportation impacts

Documents

World Resources Institutepdf.wri.org/bell/case_1-56973-131-4_full_version_english.pdfBoeing s 1992 sales were up 3 percent from 1991 levels to $30.2 billion. Total assets were $18