Martin Wins U.S. Concessions : Defense: Contractor will get half the future cost savings from its purchase of General Dynamics unit.

In a decision that could cost San Diego 2,400 defense jobs, the Pentagon agreed Wednesday to an unprecedented proposal made by Martin Marietta in which the government will give back to Martin half of the future cost savings that result from its pending acquisition of General Dynamics’ Space Systems Division.

Martin asked for the extraordinary government concessions last December, asserting that it would walk away from the proposed deal unless the government shared half of the estimated $450 million in savings stemming from consolidation of the two businesses over a 10-year period--an amount that would more than offset the $209-million cost of the acquisition itself.

Deputy Secretary of Defense John Deutch granted Martin’s request Wednesday, clearing a major hurdle for the acquisition that would reduce the U.S. space launch industry from three competitors to two and possibly result in the closure of the San Diego plant.

“The Defense Department has taken this unusual step in order to save money in the long run and support intelligent, efficient downsizing of our defense industry base,” Deutch said. “This action says the department is willing to support the ‘right-sizing’ of the defense industry.”

Under the deal expected to close in March, Martin Marietta would combine its Titan space booster business located in Denver with General Dynamics’ Atlas Centaur booster business in San Diego--merging two operations that are each struggling with excess capacity and high costs.

But “right-sizing” will mean job losses and economic pain when Martin moves to cut excess capacity.

Martin Marietta has insisted that it has made no decisions about closing the San Diego plant, but it acknowledges that it is considering such a closure along with the option of reducing operations at its Denver plant.

Based on the history of defense consolidations that have so damaged the California aerospace industry, independent experts and Defense Department insiders say that San Diego is likely to take the hit. Notably, Martin is not buying General Dynamics’ facilities in San Diego, but rather has agreed to a two-year lease on the facility where the Atlas rocket is assembled.

Deutch’s decision is certain to raise hackles in Congress, both because a major federal acquisition policy will be changed by the decision without congressional approval or public hearings, and because California is likely to get stung with another huge defense plant closure.

Rep. Lynn Schenk (D-San Diego), a member of the House Armed Services Committee, called the Martin proposal “appalling” in a letter last month calling for a congressional investigation after the proposal was disclosed by The Times.

“For all intents and purposes, it would mean that Martin Marietta is asking the taxpayers to buy the General Dynamics Division and give it to them,” she wrote. The Armed Services Committee is expected to hold hearings in several weeks.

A senior official for the Defense Department downplayed the decision Wednesday, saying that it does not represent a major acquisition policy change and that similar requests from other contractors would be judged on a case-by-case basis.

But a congressional official asserted that Deutch’s decision is a major departure from the federal acquisition regulations, a massive body of rules that govern every aspect of government purchasing.

Martin holds a contract for 41 Titan IV launch vehicles with an estimated cost of $8.9 billion, but will have an expected overrun of $570 million, according to a senior Pentagon official. Under existing contracts, the government picked up 90% of the overrun, whereas under the new cost-sharing plan, it would pick up only 50%. Thus, Martin’s risk increases if its costs continue to grow rather than decline.