Members will hear testimony on the proposed lease of 100 Boeing 767 aircraft for use by the U.S. Air Force as aerial refueling tankers. Senator McCain will preside. Following is a tentative witness list (not necessarily in order of appearance):
The Honorable John McCain
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.
While the Air Force’s costly proposal to lease 100 Boeing refueling tankers cannot be said to endanger the foundations of our democracy, the circumvention of process and reason in this case brings to mind Eisenhower’s admonitions. The question that Congress and the Administration must ask and answer is not whether proceeding with this lease proposal is in Boeing’s best interest, but whether it is in the best interests of our country.
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.
Although lease proponents claim that taxpayers have been protected, both by price concessions demanded and secured by the government, and by proposed lease terms that control costs, it is unclear how far these protections go. Price reductions obtained shortly before the lease was approved by the DoD seem to have been accompanied by reductions in aircraft capability and by an implicit promise that the government would acquire at least 200 tankers from Boeing.
That we should be acquiring the first 100 by circumventing the authorizing process in Congress and a meaningful analysis of alternatives by the military is troubling enough–that the Administration would promise to acquire twice as many planes without better justifying the need for this sole source contract, is mind boggling.
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. ###
Witness Panel 1
Mr. Christopher Bolkcom
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The Honorable Douglas Holtz-Eakin
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The Honorable James G. Roche
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Mr. Neal P. Curtin
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Witness Panel 2
Lt. Gen. John B. Sams, Jr. (USAF, Retired)
No written testimony was supplied to the Commerce Committee for this witness.
Mr. Eric Miller
I want to thank you for asking me to testify today on an Air Force proposal to lease 100 wide-body Boeing tanker aircraft – a proposal we believe is ill-advised for both the Pentagon and the taxpayers. The Project On Government Oversight (POGO) investigates, exposes, and seeks to remedy systemic abuses of power, mismanagement, and subservience by the federal government to powerful special interests. Founded in 1981, POGO is a politically-independent, nonprofit watchdog that strives to promote a government that is accountable to the citizenry. For more than a year, POGO has conducted an ongoing in-depth study into the tanker lease proposal. In May 2002, we issued a critical report on the tanker lease idea, “Fill ’Er Up: Back-Door Deal for Boeing Will Leave the Taxpayer on Empty.” Only last week, we sent a letter to the Chairman and Ranking Member of the Senate Armed Services Committee urging the committee to reject the proposal. Also, we have formally joined with such other public watchdog groups including Americans for Tax Reform, Taxpayers for Common Sense, and Common Cause in calling for an end to the deal. We hope the members of this committee will join in our fight to put an end to the unneeded and overpriced tanker lease. Since we issued our report last year, the Air Force and some Members of Congress have continued a full-court press to secure funding for the tanker lease. It has become increasing clear that the costly lease proposal has little to do with helping the nation's fighting men and women, and everything to do with padding the bottom line of an already prosperous defense contractor. The lease idea that clearly began as a gift to Boeing has suspiciously morphed into a manufactured tanker shortage crisis. The deal was originally pitched by a few Members of Congress as a financial aid package of sorts for Boeing, a contractor that was ranked 15th in sales and 38th in profits on the 2003 Forbes magazine list. The company’s rankings in sales and profits actually rose after 9/11. One of those Members of Congress doing the pitching for Boeing was Representative Norm Dicks, Democrat of Washington, who wrote a letter to President Bush on October 4, 2001, using the tragic events of 9/11 as an excuse for promoting this bad deal. “While we have promptly approved legislation that provides direct assistance to U.S. airlines, providing critical financial stability at this time, we have thus far not addressed the downstream impacts of this crisis, including the loss of work at Boeing,” Dicks wrote. The tragic events of 9/11 should not be used as an excuse to discard common sense. Then after it became clear that the lease was more expensive than an outright buy, Pentagon spin doctors began telling Congress a different story – the converted B-767 aircraft were urgently needed to replace an aging fleet of KC-135 tankers, a claim that has not been well supported. Meanwhile, evidence against the lease idea has been mounting. In a report issued last week the Congressional Budget Office (CBO) became the latest government financial agency to join the chorus of critical voices. In fact, the CBO concluded in a damaging assessment that the proposed lease “would essentially be a purchase of the tankers by the federal government, but at a cost greater than would be incurred under the normal appropriation and procurement process.” The CBO also said the proposed lease does not meet the conditions for an operating lease as required by Office of Management and Budget rules. Others, including the General Accounting Office, Office of Management and Budget, Congressional Research Service, and DoD contractor the Institute for Defense Analysis, all have suggested that leasing the tanker aircraft would be far more costly than purchasing them. There is another problem. The federal government should not reward contractors with such extraordinary handouts who do not have a record of "integrity and business ethics." Three Boeing space subsidiaries recently were suspended after an Air Force investigation revealed that Boeing was in possession of thousands of pages of Lockheed Martin's proprietary documents. A POGO study documented 50 instances of misconduct or alleged misconduct by Boeing since 1990. Indeed, POGO’s investigation shows that as recently as March 2003 Boeing agreed to an $18 million settlement with the government for alleged violation of the arms control act and international traffic in arms regulations. Rather than sweetheart deals, we should be looking at suspending repeat corporate offenders from future contracts. In response to criticism of the deal, Air Force officials, attempting to capitalize on Congressional support for new procurement funding, have only muddied the waters with distorted facts and contradictory financial projections. Yet, they too have also admitted that the lease would cost more than a purchase of the tankers. Moreover, copies of email communications between Boeing and Air Force officials made public by the Senate Commerce Committee last week point to an improper – if not outright illegal – cozy relationship between the defense contractor and the Pentagon. The emails suggest that the Air Force went to Boeing for ideas on how to sell the tanker lease rather than letting the facts speak for themselves. In a September 18, 2002 email between two Boeing executives one told the other that the Air Force was “desperately looking for the rationale for why the USAF should pursue the 767 Tanker NOW.” Another email even suggested that the Air Force’s former acquisition chief, Darleen Druyun, shared Airbus prices with Boeing officials before she left to go work for Boeing. This unnatural closeness between contractor and the Air Force should be further investigated before the government enters into any formal lease or purchase agreement for new tankers. Clearly, tanker aircraft play a vital role in the mission of the U.S. military, but the Air Force has failed to provide evidence that the KC-135 fleet is in urgent need of replacement. To the contrary, a May 2002 General Accounting Office preliminary study suggested the opposite, that the current fleet can be re-engined and updated to serve the military's mission until 2040. Air Force officials seemed to support the idea of keeping and renovating the current KC-135 fleet until the lease proposal was dangled in their faces by some Members of Congress eager to curry political contributions from a powerful defense contractor. One of the arguments the Air Force makes is that the tankers can somehow be manufactured in a shorter period of time if they are leased. In reality, a leased aircraft is not built any faster. If the need is as critical as the Air Force suggests, then the new tankers should be budgeted for purchase like any other procurement item. The Air Force’s expressed concern over tanker shortages is not credible in light of its decision to decline the purchase of 36 new 767 tankers two years ago at a considerably cheaper price. Simply put, Air Force leaders never said they even needed the tankers until they woke up one morning and saw a pile of money on the table. All of a sudden, they say the KC-135 tanker fleet is plagued with corrosion problems, and have even suggested that the current fleet of tankers is unsafe – even though the KC-135 mishap rate is lower than many other Air Force aircraft. For several reasons, POGO strongly opposes the lease idea. The CBO analysis claims that over the period of the lease the taxpayers will spend $5.7 billion more to lease the aircraft over the cost of an outright purchase. In all, the CBO estimates the tankers will cost $161 million each if the Air Force exercises an option to purchase the aircraft at the end of the six-year lease period. An independent analysis by DoD contractor the Institute for Defense Analysis concluded that the aircraft should cost considerably less and still provide Boeing with a handsome profit. Although the Air Force has just recently complained that its fleet of airborne gas stations is aging, its top brass never requested funding from Congress until recently. The purchase of the 100 tanker aircraft was not even on the Air Forces’s list of top 60 budget priorities last year. The Air Force budget wish list included requests for such areas as bomber and fighter upgrades, aerial drone targets, family housing investment, a new C-130J, and readiness spare parts. The Air Force most recently has claimed that the current tanker fleet is unsafe because of corrosion but offers no specific assessment of the extent of the problem. No wonder: A July 2003 GAO study concluded that there is no way to assess the extent of the corrosion problem because neither the DoD or military services have reliable data. Until recently, the Department of Defense has projected that the tanker fleet could be flown for decades. In fact, General Richard Myers, Chairman of the Joint Chiefs of Staff, has said that the KC-135 tanker fleet is "relatively healthy" with "lots of flying hours left on them." The Air Force has not publicly disclosed any studies that contradict Myers statements, and the recent GAO study supported his observations with data supplied by the Air Force. “As you know they’ve been re-engined,” Myers said. “We’re putting new avionics in the cockpit. There’s been a lot of work done on those particular aircraft to keep them modern.” Myers’ comments are consistent with the DoD’s official position prior to learning of the lease proposal. In response to GAO criticisms, the DoD told the GAO that its tanker fleet would not need replacing for decades. “While the KC-135 is an average of 35 years old, its airframe hours and cycles are relatively low,’’ DoD responded to the 1996 GAO tanker requirements study. “With proper maintenance and upgrades, we believe the aircraft may be sustainable for another 35 years.” By latest count, there are 545 KC-135 tankers in the Air Force fleet. Of that total, 134 are older E models and 411 are upgraded R models. The Air Force says it wants to use the 100 leased Boeing tankers to replace 127 of the 134 older E models beginning in 2006. The E models are the oldest and least capable tankers. For that reason, all of the E models currently are assigned to reserve and National Guard air units, while the newer R models are all part of the active Air Force fleet. While the average age of the KC-135s is high, the actual hours of aircraft use are relatively low, according to the GAO. The Air Force itself projects that the E models have a lifetime of 36,000 flying hours and the R models can fly for 39,000 hours. As of 1995, the GAO says the majority of the KC-135 fleet had logged a total of between 12,000 and 14,000 flight hours. From 1995 to late 2001, the average tanker has averaged about 300 hours a year, bringing the total average hours flown by most of the tankers to roughly 14,000-16,000, or less than half the total expected life of the aircraft. (The average could now be slightly higher because tanker hours have increased slightly since the war in Afghanistan.) By these calculations, not one of the E models, the oldest in the fleet, would reach its limit until 2040, according to the GAO. Even if the Air Force’s recently-crafted claims that there is an urgent need to replace KC-135 E models were true, the GAO says the quickest – and cheapest – solution may be to replace the engines of the older tankers and upgrade to R models at a cost of $29 million each. That means the bill to upgrade all 127 E models otherwise being replaced would only total about $3.6 billion, a mere fraction of the CBO’s $21.5 billion estimate to lease 100 new Boeing 767 aircraft. Even before the release last week of the communications between Boeing and Air Force officials, the tanker lease deal has been a textbook case of bad procurement policy and favoritism to a single defense contractor. The legislative add-on permitting the lease does not even attempt to cover up the acrid smell of back room dealing. It brashly subverts the competitive bidding process by authorizing the Air Force to procure 100 new tankers only if it leases them specifically from Boeing. Boeing could not have structured a better deal had it drawn the lease proposal itself. This appearance of favoritism was the subject of inquiry at a February 12, 2002, Senate Armed Service Committee hearing on the proposed fiscal year 2003 defense budget. When questioned about the deal, Air Force Secretary James Roche admitted that Air Force officials did not even discuss it with Secretary of Defense Donald Rumsfeld, Armed Services Democratic Committee Chairman Senator Carl Levin, or ranking Committee Republican Senator John Warner. Such communication is customary in the case of large defense appropriations. During the hearing, Roche was asked by Republican Senator John McCain if there had been discussions with Airbus, a division of European Aeronautic Defence and Space Company (EADS), a Boeing competitor also interested in selling wide-body tankers to the Air Force. “Yes, sir. Back as far as October I made the point that if Airbus could come in and do something, we would be delighted to have that happen,” Roche responded. “...I have met with [EADS Chief Executive Officer] Philippe Camus and have opened up the door for him if he wished to do something.” “But doesn't the legislation say the loan can only be Boeing 767's?” McCain fired back. “Yes, sir. But if Airbus did something that was particularly good, I would come back to the Congress, sir,” Roche said. Roche never did get back with Congress on the issue, but apparently was stung by hints of favoritism during the hearing. Only a week later, on February 20, 2002, the Air Force issued a formal Request For Information that gave interested tanker defense contractors only two weeks to submit a complex proposal for the lease of 100 refueling aircraft. Predictably, a cheaper-priced formal proposal by Airbus was rejected, and the Air Force is currently finalizing lease negotiations with Boeing. While the leasing of major weapons systems, aircraft, and ships are rare, the Boeing 767 lease proposal is not totally without precedent. It bears a striking resemblance to a handful of long-term lease deals by the Navy to quickly put several dozen tanker ships into commission during the 1970s and 1980s. Although at the time the leases were purported to be cheaper than buying the refueling ships outright, the GAO has since concluded the leases actually resulted in a higher cost to the taxpayers. Since the Navy leases, Congress has increased transparency of long-term leases and tightened the process to evaluate long-term leases of military equipment and weapons. Through a detailed process called “budget scoring,” the military services are now required to assess the cumulative impact of a long-term lease and compare it to the cost of purchasing equipment before Congress agrees to appropriate the funding. Now, there is a great danger that the Boeing tanker lease may be a sign of things to come and future leases could become more commonplace. In fact, the idea of leasing major weapons systems in the future has been a goal of the Pentagon since late 2001. In the name of flexibility the DoD has, in effect, declared war on close financial oversight of multi-year leasing of weapons systems, aircraft, and ships. In a 2001 memo, Pentagon Acquisitions Chief E.C. Aldridge, Jr., and DoD Comptroller Dov S. Zakheim announced a new multi-year leasing initiative, instructing key Pentagon officials to help “identify candidate programs for acquisition by means of multi-year leases.” Their memo said that long-term leasing of weapons systems has historically been rare because of statutory and regulatory “impediments.” POGO opposes such leases as a means for acquiring major weapons systems. They are likely to obligate the government to future debt that is not properly budgeted, costs more, and provides much less financial oversight. Thank you for inviting me to testify before the Committee. I am happy to answer any questions. # # #
Dr. J. Richard Nelson
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Mr. Steven Ellis
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