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US News & World Report
Cover Story 5/13/02
War profiteering
Cashing in on the post-9/11 defense build-up
By Julian E. Barnes
Copyright (c) 2002 U.S. News & World Report, L.P. All rights reserved. Republished with permission.
At 12:42 p.m. on Pearl Harbor Day, December 7, John McCain strode to a podium on the Senate floor. In his hand was a list of 245 items that had been added into the 2002 defense appropriations bill. Among his colleagues, McCain had a reputation as an acerbic critic of wasteful Pentagon spending. The reputation was richly deserved. In the past year, McCain had delivered 18 speeches on the Senate floor decrying his colleagues' seemingly insatiable appetite for pork. Over the years, the former prisoner of war had made hundreds of such speeches, flaying senators for the pet projects his sharp-eyed staffers ferreted out of the massive defense-spending bills. Even to McCain's jaded eye, however, the spending bill before the Senate that day was especially disturbing. Many of the 245 items on his list, he believed, were egregious. But one in particular stood out. It was a $20 billion Air Force plan to lease 100 refueling tankers from the Boeing Aircraft Co. The planes would cost $150 million apiece. The lease would run for 10 years. Then the Air Force would pay $30 million to reconfigure each of the 767s for commercial use and give the planes back to Boeing. In his 15 years in the Senate, John McCain had never seen such audacity. "This is the wrong thing to do," he intoned, leaning into the podium. "We are going to spend $20 billion plus over a 10-year period and 10 years from now are going to have nothing to show for it."
Some senators, however, knew they would have plenty to show. The Boeing planes would be built in Washington State, converted to tankers in Kansas, and, possibly, based in North Dakota. In due course, just as day follows night, senators from those three states rose to endorse the tanker deal. Washington's Patty Murray spoke feelingly about the impact of all the new jobs the Boeing contract would bring to her state. Kansas's Pat Roberts reminded senators how important the new planes would be in the war in Afghanistan–never mind that not a single one would be ready to fly before the war on terror moved on to other venues. It fell to North Dakota's Kent Conrad to take on McCain directly. The Arizona senator's math, Conrad said, was "sheer nonsense." Conrad didn't deign to say why McCain's numbers were wrong and his right. He knew where the votes were.
Off the Senate floor, in the storied cloakroom where Robert Taft and Everett Dirksen had long ago perfected the art of the deal, a hearty septuagenarian went quietly to work. Ted Stevens is the senior senator from Alaska and the ranking Republican on the Appropriations Committee. Slowly, he prowled the room. Rick Santorum, the junior senator from Pennsylvania, turned to Stevens, his fellow Republican. Why couldn't the Air Force keep the 767s, he asked his older colleague, after the lease was up? Stevens, wearing his favorite Incredible Hulk tie, shook his head. "We can't do that," he said. "It will queer the deal." Santorum dropped the question. Stevens moved on. Later that day, appropriators slid five Santorum amendments into the appropriations bill. The amendments added $18 million in defense projects. All were earmarked for Pennsylvania.
That wasn't the end of it. Stevens and his colleagues didn't finish adding amendments to the $318 billion appropriations bill until nearly midnight, after a mammoth round-the-clock session of horse-trading and arm-twisting. When the senators were finally through, they didn't even bother to call the roll. The measure passed on an unusual voice vote, meaning the names of the senators who supported it were not recorded. Less than two weeks later, the final version of the bill passed the House. The vote was 408-6. In the Senate, the tally was 94-2; McCain and Phil Gramm of Texas voted no.
Shades of Ike. Dwight Eisenhower, in his valedictory address to the nation, warned famously of the perils of ignoring the influence of what he christened the military-industrial complex. Ike's words have been repeated endlessly, and there have been countless editorials decrying "beltway bandits" and their predilection for waste, fraud, and abuse. But there is no gainsaying the value of the billion- dollar corporations that have provided America with the most powerful military in the world. The weapons deployed in the war in Afghanistan, for example, are many times superior to the smart bombs and surveillance planes of the Persian Gulf War just a decade ago.
There's another side of the coin, however. Before September 11, government contractors regularly paid bribes, cut corners, and delivered high-priced hardware that didn't work. Instead of being sanctioned or barred from competing for future government contracts, many of these same companies–and often, the largest of them–returned to the bidding room and walked away with new contracts many times bigger and fatter (related story).
It's not just contractors who have managed to game the system, however. Members of Congress have long been eager enablers of the binge drinking that often passes for government spending in Washington–especially when they can ensure that lots of that spending happens back in their home states and districts. The larding of pork into legislation is a time-honored tradition. But what has dismayed pork-watchers is how even after September 11 lawmakers, lobbyists, and government contractors continue to use the defense budget for all kinds of new spending schemes (related story).
In overwhelming numbers, Americans support President Bush's decision to prosecute the war on terror. But it is not immediately clear how a new gym in Texas, a harbor cleanup in California, or raising a Civil War-era ironclad in Virginia do much to advance that war. A veteran congressional aide who specializes in defense issues has written a white paper under the pen name "Spartacus" attacking projects like the Boeing deal that have been inserted in the defense- spending bills since September 11. McCain has demanded investigations of the Boeing deal. "This is clearly war profiteering," he says. "It is obscene."
Done deal. It is also, in all likelihood, going to happen. James Roche, the Air Force secretary, says the cost comparisons between a lease and a purchase agreement for the Boeing planes are premature and simplistic. A lease deal, Roche says, would allow the Air Force to pay for the planes more slowly while acquiring them more quickly. The Air Force would reap billions of dollars in savings from retiring old tankers and avoiding big maintenance costs, Roche adds, by flying more-modern, fuel-efficient aircraft. "We want to be transparent as we can be," Roche said. "We are not blowing smoke up anyone's nose." The Air Force and Boeing declined to provide new cost estimates for a lease or a purchase.
For Boeing, obviously, the deal is, if not a lifesaver, an awfully well-timed windfall. The September 11 attacks resulted in a huge drop-off in air travel, and airlines canceled millions of dollars in orders for new planes. On September 18, Boeing announced that it would lay off up to 30,000 people. Soon after, Congress lined up behind a $15 billion bailout for the airlines. Boeing was already in the hunt for its own aid package. The aircraft maker has plenty of friends on Capitol Hill. Since 1997, according to the Center for Responsive Politics, Boeing's executives and political action committees have given Democrats $1.9 million and Republicans $2.6 million. By late September, Rudy de Leon, Boeing's chief lobbyist and a former deputy secretary of defense, met with Stevens.
An acknowledged master of the arcane appropriations process, Stevens quickly breathed new life into Boeing's proposal for the Air Force to acquire a new fleet of 767s. The senator called Air Force officers and told them he wanted the service to explore "creative funding" to acquire new Boeing planes to replace the aging KC-135 tanker refueling fleet, according to a congressional defense aide. Stevens told Air Force officials what he had in mind was a lease. "It was my idea to start replacing the fleet," Stevens says. "And my idea to use the leasing."
The lease deal, Stevens says, expands the amount of money available for new weapons systems by not dipping into the Pentagon's procurement budget and by tapping its operations and maintenance funds instead. But that budget is normally used to pay for training and to buy bullets, bombs, and spare parts. With the arsenal depleted from the Afghanistan war, some in the Pentagon say, now is not the time to raid the operations budget.
Not to worry, proponents of the lease deal counter. Stevens says that the savings from retiring old planes that need constant maintenance will offset some of the costs. Marvin Sambur, the Air Force assistant secretary for acquisitions, says the Pentagon can always move money from other parts of the budget. "It will not hurt readiness," Sambur says, "because, obviously, if the need be, we will have to put more money in the operations-and-maintenance budget.''
Low priority. If the refueling tankers were as important as the Air Force says, the service certainly hadn't made much of a fuss about them before Congress got into the act. It wasn't until October 9 that Roche wrote Rep. Norm Dicks, a Washington Democrat, to ask for the tankers. The Air Force hadn't mentioned them in the Quadrennial Defense Review, a key budget document published just a few weeks before Roche's letter to Dicks. They also weren't mentioned in the Pentagon's classified Future Years Defense Plan. Even after Roche's October 9 letter, the tankers weren't added to the Air Force's list of 60 unfunded priorities submitted to Congress, on October 22.
Just because the Air Force didn't ask for the tankers, however, doesn't mean it didn't need them. As far back as 1996, a General Accounting Office study criticized the growing repair costs for the aging KC-135 tankers. The average age of the KC-135 fleet is 41 years. Sambur says the extensive use of the tankers in the Afghan war really revealed the stresses on them. "The only time when you really think of tankers," he says, "is when you are in a war-type environment."
Pentagon and congressional aides say the tankers never made the Air Force wish lists because the brass worried that adding them would mean cutting F-22 fighters and C-17 cargo planes. Critics say the C-17 is too expensive and believe the F-22 is designed to meet a threat that no longer exists. The Air Force wants both–badly. "If they highlighted that the tankers were a problem," a Pentagon analyst says, "Congress might have jumped on it and taken money from the C-17 and F-22." The lease deal, in other words, could allow the Air Force to have its cake and eat it, too.
Although the lease plan won admirers among top Air Force officials, elsewhere in the Pentagon there were doubters. According to a Defense Department cost assessment, the Pentagon found that the lease would cost an extra $11.8 billion. Pete Aldridge, the Pentagon acquisitions chief, says leasing lowers initial costs, but he acknowledges the drawbacks. "Leasing will always exceed the price of purchasing," he says. Boeing, he believes, will eventually try to extend the lease, "which is a good deal for the company. It is not such a good deal from a total point of view for the military."
Because of that, some in the administration hate the deal. On November 2, Mitchell Daniels, the director of the Office of Management and Budget, wrote a two-page letter to Conrad, the Senate Budget Committee chairman. Past leases had led to cost overruns, the letter said. Because of those abuses, OMB required the Boeing deal to be accounted for like a normal purchase. "I believe it is more important than ever," Daniels wrote, "that we properly record the obligations and costs of the government."
To get around Daniels's objections, appropriators decided in November to change the deal. If the Air Force gave the planes back at the end of the lease, or had to pay a substantial residual payment to keep them, the deal could be considered an operating lease. That meant appropriators could spread the costs out over many years. The compromise met the letter of the budget rules, but it also made a bad deal worse, because after the 10-year lease ended, the Air Force would be left with no planes. And now, U.S. News has learned, the proposal could get worse still. Pentagon, Boeing, and congressional sources say the lease will last only five to seven years. That will reduce the expense but means the Air Force could get even less use from the tankers. And a GAO study released last week says a lease could leave the military with a tanker shortage in 2015.
Opponents of the lease have not given up the fight. Daniels notes that the final agreement between Boeing and the Air Force has not been signed yet: "You haven't seen any planes delivered." McCain says he'll try to put a measure in the new defense authorization bill that would force the money for the lease to come from the procurement budget, not from maintenance funds. "We need to focus attention on one of the great rip-offs in the history of the United States of America," he said. "And I don't say that lightly."
Air Force brass, unsurprisingly, don't see it quite that way. Sambur, the Air Force acquisitions chief, pledges he won't sign any agreement that hurts taxpayers: "We want to make sure this deal is good for America."
With Noam Neusner and Mark Mazzetti
CROSS HAIRS
Hardened target
Defense Secretary Donald Rumsfeld has pledged to kill unnecessary Cold War-era weapons and spend money on new technology. His first target: the Army's Crusader howitzer, an $11 billion, 42-ton tracked gun originally developed to fight the Soviet Union.
But the Army wants to save the program. And since the Crusader would be built and tested in Oklahoma, powerful Republican lawmakers Rep. J. C. Watts and Sen. James Inhofe will fight the fight on Capitol Hill. Frank Carlucci, a former defense secretary and president of Carlyle Group, whose subsidiary United Defense Industries is building the gun, can also be expected to lobby to keep Crusader off the chopping block. – M.M.
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