By George C. Wilson
February 5, 2002
An internal Defense Department document obtained by National Journal outlines a Pentagon master plan to stop buying many of the nation's most expensive weapons. Instead, the one-time corporate executives now running the defense establishment want to rent them. Or, more accurately, to lease them for a number of years.
Leasing a weapon, proponents say, has certain advantages similar to those of leasing a new car. You pay less up front and you get the new weapon right away instead of having to continually fix up the old weapon while trying to save enough money to buy a new one. Then, at the end of the lease, when you've gotten good use out of the weapon, you can either return it or buy it.
For a giant government enterprise such as the Defense Department that never has enough money in hand to buy all the planes, tanks, and ships the generals and admirals insist they need, leasing is an appealing way to arm the military in a hurry. Leasing also has the political advantages of keeping the Pentagon budget from ballooning in any one year or busting through annual congressional money ceilings, and it can push the costliest part of a leasing deal into the out years-and onto the next President.
But critics of leasing are many, and they include Mitch Daniels, President Bush's budget director; the pork-slicing Sen. John McCain, R-Ariz.; and Senate Armed Services Committee Chairman Carl Levin, D-Mich. They contend that government leasing has often been a rip-off of the taxpayers in the past and will be in the future if controls designed to curb abuses are eased. The Pentagon, not surprisingly, wants some of those curbs lifted to ease the new leasing deals.
Opposition to leasing weapons resurfaced during the recent debate over the Air Force proposal to lease 100 Boeing 767 airliners, to convert them to refueling tankers, and to then return them to the economically strapped company after 10 years. The Air Force is short of modern tankers and is spending millions of dollars annually to fix up its old ones. McCain, however, derided the leasing plan as "absolute insanity," because taxpayers would end up paying as much or more for renting the tankers for 10 years as they would for buying them and using them for 30 or 40 years.
But he and other critics haven't seen anything yet, if the Pentagon has its way on leasing. The rent-a-weapon strategy is revealed in a letter that Pentagon procurement chief Edward C. "Pete" Aldridge Jr. and Defense Department Comptroller Dov S. Zakheim wrote on November 1 to the Secretaries of the Army, Navy, and Air Force, plus the head of the Special Operations Command-who is supplying troops to the war in Afghanistan against terrorism. In the letter, obtained by National Journal, they call for Congress to make sweeping changes in existing budget rules to allow widespread leasing of military hardware. Their plan may well put the White House Office of Management and Budget at battle stations. Its director, Daniels, blames free-wheeling leases for outlandish cost overruns in government programs in the past. Daniels cites as an example the lease-purchase deal that pushed the cost of the Ronald Reagan government office building in Washington from an estimated $362 million to an actual $800 million.
"The [Defense] Department," the Aldridge-Zakheim letter states, "plans to propose some or all of the following statutory and regulatory changes to eliminate the most serious impediments to the greater use of multiyear leases:
"Repeal of the statutory limits upon the length of leases and enactment of authority to enter into long-term leases funded with annual appropriations." This means that it would be easier for the Pentagon to lease whatever it wants for as long as it wants.
"Eliminate the legislative requirement that funds be reserved to cover" the cost of breaking the lease.
"Change budget scorekeeping rules for leases in Office of Management and Budget Circular A-11" and "change methodology of the lease-purchase analysis in OMB Circular A-94."
The circulars refer to the rules that congressional and executive branch budget scorekeepers use to calculate how much the government is spending today and will spend tomorrow on various programs. The apparent Pentagon objective is to revise the rules of calculation so that leasing would look cheaper and more financially appealing. Such a liberalization of the rules would certainly be opposed by some powerful members of Congress and most likely by Daniels as well.
"If you know of other statutory or regulatory changes that would facilitate an increased use of leases," Aldridge and Zakheim continue in their letter, "we ask that you identify them to us promptly. We are jointly establishing a Leasing Review Panel and request that you identify candidate programs for acquisition by means of multiyear leases."
As soon as McCain learns that the leasing plan for the Boeing Co. airplanes is only the beginning of the Pentagon's rent-a-weapon scheme, he will almost certainly go into higher orbit than the one he reached on the Senate floor in December on Pearl Harbor Day. Back then, he assailed the plan to lease the 767s as "a bailout for Boeing Aircraft-nothing more, nothing less.... There should be hearings in the Senate Armed Services Committee when we are talking about $20 billion or $30 billion of taxpayers' money to be spent.... This is the wrong thing to do." Sen. Phil Gramm, R-Texas, joined him in his criticism: "I do not think I have ever seen a proposal that makes less sense economically."
Despite the attacks by McCain and Gramm, Congress authorized the Boeing leasing deal in the fiscal 2002 Defense appropriations bill, which President Bush recently signed into law. The law does not order the Air Force to lease the planes, but it does state that the Air Force Secretary "may" lease the 767s, as well as four of the company's 737 airliners. The 737s would presumably haul government VIPs around the country, even though the Air Force did not request these planes.
Daniels was so cool to the Boeing proposal that many Capitol Hill staffers believed that a leasing deal would never be made. During last year's debate, Daniels not only warned against scrapping the rules designed to curb leasing abuses, but wrote this to Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee, in another letter obtained by National Journal:
"The [Budget Enforcement Act] scoring rules were specifically designed to encourage the use of financing mechanisms that minimize taxpayers' costs by eliminating the unfair advantage provided to lease-purchases by the previous scoring rules. Prior to the BEA, agencies only needed budget authority for the first year's lease payment, even though the agreement was a legally enforceable commitment to fully pay for the asset over time.
"In the late 1980s," Daniels continued, "[the General Services Administration] used this loophole to enter into 11 lease-purchase agreements with a total long-term cost of $1.7 billion, but budgeted only the first year's lease payment. The scoring hid the fact that these agreements had a higher economic cost than traditional direct purchases and in some cases allowed projects to go forward despite significant cost overruns ...
"If the proposed lease of [Boeing] 767 aircraft includes a waiver of the lease-purchase scoring rule" for calculating the impact on the budget, "I would view it as a violation of the agreement between the Congress and the President to limit appropriations to $686 billion in FY 2002. For the reasons stated above, I would oppose its inclusion in any legislation presented to the President."
The law authorizing the Boeing lease contains restrictions apparently designed to allay the concerns of Daniels and other critics. Air Force Secretary James Roche told the Defense Writers Group on January 18 that the Boeing lease plan is still very much alive, and he served notice that to clinch the deal, Congress may have to suspend some of the leasing restrictions. President Bush may have to choose between the advice of his budget director and the wishes of the Defense Department if the rent-a-weapon proposal keeps moving forward.
"At some point during the ongoing discussions with Boeing, it will become clear whether existing rules stand in the way of a good deal," Roche said. "If it looks like a good deal if we had relief [from] A or B, we'll go forward and ask for relief from A or B, assuming the [Defense] Secretary agrees. If it looks like we can't get there, we won't do it."
Asked whether he prefers buying the 767s over leasing them, Roche answered, "Sure." But he said outright purchase "might be too great an increase in the top line" of the Pentagon budget. "This is not fair to the President's budget with regard to other departments" and might also take money away from the other armed services. "And that is not right," he said.
Leasing, rather than buying, is nothing new for the Pentagon, the Air Force Secretary said. "We lease communications. We lease all over the place." Getting 100 new tankers quickly by leasing them, Roche added, would save millions of dollars now being spent in keeping the old planes flying. He said he would welcome proposals from other companies, notably European Airbus, to supply the Air Force with tankers, partly because the competition would force Boeing officials to "sharpen their pencils" in arriving at leasing prices.
Levin, however, said on January 15 that the Boeing leasing plan is not "a done deal," and that he plans to look closely at the Pentagon's wider leasing scheme.
Given the widespread cynicism generated by Enron Corp. and the way some corporations do business and play with dollars, Congress's handling of the Pentagon rent-a-weapon plan should be a no-brainer. Put the plan under the microscope of public hearings. The Boeing leasing deal was done pretty much in the dark-no congressional committee held hearings, for example. Don't Enron the taxpayers on rent-a-weapons.
By George C. Wilson
February 5, 2002