The Testimony of
The Honorable John McCain
Chairman, U.S. Senator (R-AZ)
In his farewell address in 1961, President Dwight Eisenhower warned of the need to protect democratic processes, stating, "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist ." He also cautioned against the folly of living for today and plundering the resources of tomorrow.
Months after the tragedy of September 11 depressed the commercial aircraft market and Boeing lost out on a bid for the Joint Strike Fighter, Congressional appropriators added a rider to the 2002 Defense Appropriations bill authorizing the Air Force to lease up to 100 Boeing 767s for use as aerial refueling tankers. This leasing authority, which ultimately could cost taxpayers tens of billions of dollars, was given to, and the acquisition was zealously pursued by, the Air Force despite the fact that the military had not previously indicated an urgent need for new tankers and leasing the aircraft will cost American taxpayers billions more than buying them outright.
Just because the Department of Defense (DoD) was authorized by an appropriations rider to lease the tankers does not mean that it should. But with Congress' blessing, it is about to. Three of the four defense committees that are required to approve the lease have already done so. Two of the three committees that approved the multi-billion dollar proposal did so without a hearing, and none of the three could have reviewed the final lease since certain clauses in it are still being negotiated. The Senate Armed Services Committee, which under the Chairmanship of Senator Warner did not rush through its approval of the lease prior to the August recess, is holding a hearing on the proposal tomorrow morning.
It was reported that, just yesterday, Air Force Secretary Roche said the lease could still collapse if the parties can't resolve two key contract terms. If these terms, which deal with capping Boeing's profit and ensuring that the government receives a good deal on price, are as critical as the Secretary indicates, the Senate Armed Services Committee (SASC) should not decide whether to approve the lease until all the lease terms and conditions are resolved and made known.
The lack of scrutiny this deal has received until now is extraordinary, particularly at a time when our budget deficit is burgeoning and the extent of our financial obligations in Iraq is just now being understood. The committees that signed off on the deal did so before hearing from experts, both in and out of Congress, who have assessed this unprecedented transaction. Just last week, CBO issued a report concluding that the proposed lease simply is not permitted by law, and that the additional cost of leasing as opposed to buying the planes outright will be considerably more than the Air Force claims.
Yesterday, the DoD Inspector General opined that not only should a formal AOA have been conducted, but also that leasing the aircraft and then returning them to the Special Purpose Entity appears to be an inefficient use of money. In addition, he questioned why the Air Force did not acquire fewer planes until the funding is obtained through the budget process to purchase the aircraft and it can be shown that the tanker meets warfighter requirements, and noted that the federal government assumes greater financial risk with a lease than a procurement.
The Congressional Research Service and General Accounting Office also have raised serious questions about this transaction. CRS has, among other issues, examined the controversial question of the alleged urgent need for these tankers. GAO has also expressed concerns with claims about the urgent need to recapitalize the tanker fleet, the total cost of the program, and the extent to which the proposal complies with the law.
An editorial in the Wall Street Journal this morning suggested that there was a consensus on the urgent need to replace the current tankers. The editors are apparently unaware that the Air Force and Boeing found no such need in a study they conducted last year. In addition to CRS, the DoD Inspector General, and GAO, officials at OMB and many other experts also have questioned the urgency of the tanker replacement, suggesting that the tanker fleet is in good condition and can perform its mission until it can be replaced over time in the most cost-effective way.
A number of taxpayer and public interest groups also have raised questions with the proposed lease, with perhaps the strongest statement in opposition coming from the non-partisan Citizens Against Government Waste, who today issued a press release characterizing the lease as "expensive, unnecessary, budget-busting, scandalous, and the worst example of corporate welfare and backroom deal-making in recent memory."
In addition to receiving information from others who have examined the proposal, the Committee undertook its own inquiry into the process by which this lease was developed. The story that is told by the documents provided voluntarily to the Committee by Boeing and, to a much more limited extent, by the DoD and OMB, is one of an extremely aggressive sales pitch not only by a company whose mission is to protect its shareholders and to make profitable deals, but by the United States Air Force whose mission is very different. From the beginning, the Air Force appeared not so much to negotiate with Boeing as to advocate for it, to the point of appearing to allow the company too much control not only over pricing and the terms and conditions of the contract, but perhaps also over the aircraft's capabilities.
The documents obtained provide a troubling view of the extent to which the company, and not the military, controlled this acquisition. They do not answer, however, why Congress by-passed the normal review process and authorized, nor why the DoD, OMB, and the White House signed off on, an extraordinarily costly method of acquiring planes from a single source without ever clearly establishing the need for them or conducting an analysis of alternatives.
Certainly, serious concerns with the costs of the lease and its compliance with leasing criteria were raised by officials within the Department of Defense and OMB. Even after the Air Force announced in May of this year that DoD had approved the lease, the Department's Office of Program Analysis and Evaluation, which provides independent analytic advice to the Secretary of Defense, opined that the proposal did not meet legal requirements.
Last year, before the budget deficit ballooned and before we incurred the obligation to reconstruct Iraq, then-Director of OMB, Mitch Daniels, wrote to me that, "I believe it would be inconsistent with OMB circulars and irresponsible to support any lease proposal which would cost taxpayers more than direct purchase." Yet even the Air Force's report to Congress, which CBO says seriously understates the difference in cost, admits that leasing the planes and then buying them is more expensive than a direct purchase.
It remains unclear how OMB's concerns about the price of the planes were resolved. We will hear today from an analyst hired by the DoD to determine how much the government should pay for the Boeing tankers. This expert concluded that, factoring in a generous profit for the company, the cost of a 767 tanker with more features than the one we propose to lease should be $120.7 million. Despite this, the Air Force has apparently agreed that Boeing will get paid $131 million (in '02 dollars and subject to cost escalation), for each aircraft, although, as a CBO report explains, taxpayers actually will end up paying at least $161 million per plane in lease payments, interest payments, and payments to buy the plane at the end of the lease period.
The value of any concessions on the price of the plane must also be considered against the overall value to Boeing of the lease. An aspect of the lease that until now has received almost no attention is a $5 billion plus maintenance contract for the new tankers that the Air Force has negotiated with Boeing. Five billion dollars. That represents about 25 percent of the total cost of actually acquiring the tankers, and it appears to have been negotiated as a sole source contract. Why the Air Force decided not to seek competitive bids for the aircraft maintenance is unclear. Why it agreed to pay $5 billion plus for a maintenance contract when Boeing had, in 2001, sent an unsolicited bid to the Air Force offering to maintain tankers for $2 million per plane per year, (perhaps a quarter of what the Air Force has now agreed to pay), is unexplained. Can it be said that the government really got a lower price when the lease proposal covering the acquisition includes an enormous maintenance contract for the seller? The fungibility of Boeing's compensation seems to have been appreciated by the Air Force, and in one communication, the Air Force wrote to Boeing that while DoD's marching orders were to negotiate a contract not to exceed $131million, "we can modulate as necessary to make everyone happy while keeping the NTE number intact."
We are all disposed in these times to give leeway to claims of military necessity, but the case for urgent need that lease supporters claim justifies this extraordinary transaction simply has not yet been made. The economic case is also wanting. It is considerably more expensive to lease rather than to buy the aircraft, and, as CBO stated in its report, "rather than eliminating difficult budgetary decisions, the lease merely postpones them." This sounds very much like the "living for today and plundering the resources of tomorrow" that President Eisenhower warned us about over 40 years ago. It is not too late to heed that warning.
|Join the GlobalSecurity.org mailing list|