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RULES CIRCUMVENTED ON HUGE BOEING DEFENSE CONTRACT
October 27, 2003
The Boeing Co.'s campaign to win federal backing for a lucrative new military airplane contract was in trouble in October 2002. The head of the Office of Management and Budget had just told the Air Force and Congress that the acquisition plan -- which featured the most costly government lease in U.S. history -- was not urgent and would squander billions of dollars.
Then White House Chief of Staff Andrew H. Card Jr., acting at what officials say was the direction of President Bush, told the Air Force and OMB to resolve their differences. Bush had been lobbied hard by House Speaker J. Dennis Hastert (R-Ill.) and Rep. Norman D. Dicks (D-Wash.), whose districts are in states that include, respectively, Boeing's headquarters and a key production facility.
Given the depth of the speaker's feelings about it, Bush really hoped something could be worked out, Card told others, according to a participant in the internal deliberations. And with Card's intervention, obstacles to the deal eventually fell away. Vehement objections raised by OMB and Pentagon budget analysts -- that the planes were too expensive and that leasing would set a bad precedent -- were muted or withdrawn.
Card's intervention was but one fruit of a two-year lobbying campaign, mounted jointly by the Air Force and Boeing, that has brought the $21 billion to $25 billion deal within one congressional hurdle of being passed. An examination of that campaign, based on dozens of interviews and thousands of internal e-mails Boeing surrendered to the Senate Commerce, Science and Transportation Committee, shows how Boeing circumvented the usual route of Pentagon acquisitions -- and, with it, many of the rules and regulations enacted over the past three decades to forestall defense contracting abuses.
"This thing," Senate Armed Services Committee Chairman John W. Warner (R-Va.) said at a Sept. 4 hearing, "is a very skillful, really, Hail Mary pass, long run around the process." His panel is the only one of four congressional committees that has yet to approve the tanker acquisition -- and it may be only days away from doing so.
Under the contract, Boeing would produce 100 refueling tankers based on its 767-model airliner, a deal Dicks predicts would be expanded and eventually bring the giant weapons manufacturer $100 billion. That would make it one of the most expensive military programs this decade.
Leasing, rather than buying, is the key to the deal: The Air Force, under current budgeting, cannot afford to buy so many aircraft at once. Leasing would permit it to pay less up front, although it would ultimately pay as much as $5.7 billion more overall. And Boeing would be able to keep its 767 production line active despite a decrease in commercial orders for the plane. Sen. John McCain (R-Ariz.) and others have denounced the program as corporate welfare born in backroom dealing. Air Force Secretary James G. Roche has said it is a cost-effective way to modernize an aging tanker fleet.
In getting this far, the Air Force never conducted a formal study of alternatives to leasing new tankers, as is standard, and it did not formally study the degree of age-related damage to its existing tankers. It never conducted a formal competition before signing the contract, or arranged to test the new tankers before committing to lease all of them.
The deal was approved by a new Pentagon leasing review panel that operates with a fraction of the oversight and regulatory control associated with such recent military acquisitions as the Joint Strike Fighter, the FA-22 attack fighter and Stryker armored vehicle. It is the first in a series of big leases the Pentagon is contemplating, all of which push costs into the future.
Some Pentagon officials remain convinced that the tanker leasing agreement, signed by the Air Force in July, does not meet federal accounting standards, a view shared by the General Accounting Office. Two weeks ago, the nonpartisan Congressional Budget Office said it was actually a purchase disguised as a lease, making it "significantly more costly" than a normal purchase.
Ordinarily, such costly military systems are procured after being included in formal budget proposals, which lead to congressional hearings and votes in committees and on the House and Senate floors. In this case, no hearings were held or committee votes taken before the deal was approved in the House and in the Senate Appropriations Committee.
In December 2001, language authorizing the deal -- but providing no money -- emerged in legislation in what Hill veterans refer to as a "virgin birth," meaning it was inserted into the defense appropriations bill after the bill had passed the House and Senate, during closed negotiations between conferees. It was then approved on the House and Senate floors as part of a compromise bill.
Senate Appropriations Committee Chairman Ted Stevens (R-Alaska), a longtime supporter of expanding federal leasing, has claimed credit for inserting the language. One month before he did so, he received $21,900 in campaign contributions from 31 Boeing executives at a fundraiser in Seattle, where Boeing has many employees.
Thirty of those contributors -- including executives from the Boeing division that makes 767s -- had not contributed to Stevens in the previous decade, according to records collected by the nonpartisan Center for Responsive Politics and first reported by Defense Week. Stevens spokeswoman Melanie Alvord said there is no connection between the contributions and the legislation.
Stevens is hardly the only supporter of the deal to receive Boeing campaign contributions. About 55 percent of the company's expected revenue of $49 billion this year will come from the federal treasury, and the company has been generous to Congress and the administration. Over the past decade, its employees and political action committees have given $925,000 to members of the four House and Senate committees that handle defense matters, according to the watchdog group Common Cause. The company also gave $100,000 for Bush's inauguration.
Last week, Boeing's congressional supporters sought to include money for the leasing deal in the administration's high-priority $87 billion appropriation bill for Iraq and Afghanistan. If they succeed, the provision will emerge this week from House-Senate conference without having been considered beforehand by either chamber.
Many existing tankers have flown only a third of their planned lifetime, the study pointed out, and have averaged 12.5 days of flight a year. A separate Air Force study in 2000 concluded that corrosion, a growing problem in aging tankers, was manageable if watched carefully and aggressively repaired. After Boeing made its proposal for new tankers, Roche called both studies flawed.
After the Sept. 11, 2001, terrorist attacks, Boeing pressed the idea with new vigor. Airlines had deferred commercial orders for 767s, and Boeing laid off thousands of employees at plants in Everett, Wash. But the Air Force had not even listed tankers among its "unfunded priorities" in 2001, a multibillion-dollar wish list of weapons it wanted but could not afford. The Air Force had no money to buy the tankers, so on Sept. 25, 2001, the company's top executives met with Darleen A. Druyun, then a senior Air Force acquisitions officer, at the Pentagon to work out a lease deal instead.
Druyun agreed at the meeting, according to notes taken by Boeing, not only to promote the leasing idea on Capitol Hill but also to find needed money by cutting back a comparatively inexpensive modernization program for existing tankers -- an arrangement, Boeing and the Air Force have acknowledged, that will retire flightworthy tankers early to procure new ones.
She also said "work placement could help," meaning that Boeing should ensure that subcontracts were awarded in the districts of key Congress members, according to the notes. She noted further that Stevens could "work" a former employee of his who was then at the Office of Management and Budget. And she asked Boeing to help produce briefing charts the Air Force could take to Stevens's office, and nowhere else.
"The AF is to make no other distribution on the Hill," a Boeing executive wrote in an e-mail on Oct. 17, 2001.
It was the beginning of an effort by the company and top Air Force officials to propel the deal forward -- an effort in which, according to Boeing e-mails, Druyun would explore getting Congress to approve a special waiver of federal accounting rules and advise Boeing on how to win over key lawmakers. McCain said the e-mails demonstrate that "the Air Force appeared not so much to negotiate with Boeing as to advocate for it, to the point of" giving Boeing unusual control over pricing, and other terms and conditions.
Rudy DeLeon, a former Air Force undersecretary and deputy defense secretary who became the head of Boeing's Washington office in July 2001, said in an interview that the e-mails show that "people who believed in the program" were working hard to get it completed. A company official defended the lobbying effort as common practice and said the only atypical thing about it is having it on public display in the e-mails. Druyun declined to comment.
Shortly after the Boeing-Druyun planning meeting, a senior Air Force official summarily dismissed an earlier tanker lease proposal from a small firm called Frigate International Airways. He explained that leasing was constrained by budgeting processes and said that "operational needs [mandated] . . . strict ownership, title and control" of any tankers -- a demand the Boeing deal could not meet.
In November 2001, the Air Force drafted a document spelling out what capabilities the new tankers must have. Col. Mark Donohue, an official in the air mobility office, promptly sent it to Boeing for private comment, and the company sought, and received, concessions so the requirements matched what the 767 could do. The Air Force agreed to drop a demand that the new tankers match or exceed the capabilities of the old ones.
Philip E. Coyle III, an assistant secretary of defense for test and evaluation from 1994 to 2001, said he was surprised by this. The plane's operational capabilities, he said, should be pegged to what the military needs and "should not become the subject of lobbying, nor of endless negotiations."
Boeing then strove to "prevent an AOA [analysis of alternatives] from being conducted," according to a Boeing briefing chart presented to top executives in late 2001 and other e-mails. This, too, surprised Coyle. An AOA "is done virtually every time" a major weapon system is acquired, he said. The company's aim in blocking such an analysis was primarily to avoid delaying delivery of the tankers, John Sams, Boeing's tanker program director, said in an interview. In any event, he said, Stevens's amendment to the defense bill that December already had specified Boeing 767s, so consideration of other options was moot.
Other concessions were in price negotiations, according to e-mails. Druyun "spent most of the time bringing the USAF price up to our number. . . . It was a good day!" a Boeing executive wrote in June 2002.
"This is a classic case of the Iron Triangle" in defense contracting -- the alliance between corporations, the government and affected members of Congress, Jeffrey P. Bialos, a former deputy undersecretary of defense for industrial affairs during the Clinton administration, said after reading the e-mails. The seller in such an arrangement, he said, "works with the government to create the demand."
An Air Force financial consultant told Boeing at one point that it was good that attention was focused on Enron instead of "your illogical accounting posture," according to a Boeing e-mail. Among critics of the deal, Sen. Peter Fitzgerald (R-Ill.) said the Air Force seemed to be using the trust to obscure the deal's cost and reduce its transparency.
In addition, Mitchell E. Daniels Jr., then chief of the Office of Management and Budget, told members of Congress in a series of letters that the deal was "irresponsible" because it did not meet federal leasing rules, cost too much and would actually cause a net decline in refueling capacity as 767s replaced existing tankers. It was, he told colleagues, the kind of deal that gave defense contracting a bad name.
Bob Gordon, a Boeing vice president, worried in an August 2002 e-mail that the company could have a "PR risk" because the idea that leasing was preferable to buying "won't make sense in the newspapers." Furthermore, he wrote, neither Boeing nor an investment banking firm familiar with the deal "would ever put its hand on a bible and say that makes economic sense."
Moreover, the Institute for Defense Analyses, an independent think tank, told the Pentagon after a detailed study that the Air Force was overpaying by at least $21 million per plane and that the lease violated federal accounting rules. "The concern remains that we are not giving the [U.S. government] a fair deal. This continues to be driven by the IDA study and OMB," Boeing defense systems president Jim Albaugh wrote at one point.
Boeing executive Thomas Owens wrote in an e-mail that Roche asked the company to pressure his Pentagon bosses to squelch the study. Roche, through a spokesman, called the allegation preposterous. The institute, in fact, did not back down.
To overcome opposition to the deal, Air Force officials sought to use Boeing's political connections to discredit critics by forging a grass-roots strategy, e-mails say.
One quotes Bill Bodie, a senior adviser to Roche, as urging Boeing executives to "have our friends on the Hill, think tanks, etc. get more visible/vocal" in registering their support for the program. The aim was to "drown out McCain" and "insulate/support" Roche, the e-mail said. Bodie declined to comment for this story.
The company sought to solidify support from Rep. John P. Murtha (Pa.), the senior Democrat on the defense appropriations subcommittee, by agreeing to explore a subcontract to a firm in his district, some of the e-mails state. Boeing and the Air Force jointly planned a campaign "to educate the media" on the merits of the deal.
Boeing also asked retired Adm. Archie Clemins, a former commander in chief of U.S. forces in the Pacific, to submit an op-ed article touting the 767 tankers to Navy Times, a part of the Gannett media chain. Clemins acknowledged in an interview that Boeing "helped me write that." In an internal e-mail, a company official called it "ghost-written." The article appeared in five Gannett publications. Months later, Boeing hired Clemins as a consultant. A Boeing spokesman said he "was aware of no relation between the hiring and the op-ed."
Tobias Naegele, editor in chief of the Army Times Publishing Co., which runs the magazine, said: "The piece came over without any indications he wrote it with anyone else. We really should have asked him, and it is standard practice now."
A Boeing consultant on the Pentagon's Defense Policy Board, former vice chairman of the Joint Chiefs of Staff David E. Jeremiah, was tasked to "engage in OSD [Office of Secretary of Defense] circles," a Boeing e-mail said. Jeremiah said he did not engage any defense officials on the tanker issue.
One Boeing e-mail noted that "we are in touch with Andy Card and White House political operation." It said a "union strategy [was] in play," which McCain has interpreted as a go-ahead to Arizona labor unions, which ran advertisements calling on him to register as a lobbyist for Airbus, a Boeing competitor.
Boeing executives contacted key subcontractors last winter and "urged them to be part of the debate" by calling Card and other administration officials, DeLeon said. Hastert, whose district lies 30 miles from Boeing's new headquarters, and Dicks directly reached Bush in late September 2002. According to a Boeing e-mail, Bush asked Card to be "on point" for the deal.
A month later, a Boeing e-mail said, Card called Roche and others to the White House and asked them to detail how many jobs the leasing deal would create; this was a key issue for an administration during which 2.5 million jobs have been lost. Boeing executives wrote in an e-mail to Druyun the next day that the lease would support 25,000 to 30,000 jobs, including both existing and new workers.
The next day, Roche sent a letter to Card that overstated this tally. Citing Boeing as his source, he said the deal would create about 39,000 new jobs alone -- more than 11,000 at Boeing and 28,000 among suppliers, according to the letter. Asked to explain the discrepancy, Air Force spokeswoman Cheryl Law said Roche felt his numbers were "consistent" with Boeing's.
Card led other meetings about the deal, met with Boeing officials and took calls from Dicks and Boeing lobbyists, according to the e-mails. White House spokesman Trent Duffy said, "I think it's appropriate for him to work on an issue of great importance to fulfill a needed capability . . . and to make sure the taxpayers get the best deal for their money."
Under continuing pressure from OMB, Boeing agreed to cut the price of the tankers, bringing it closer to the Institute for Defense Analyses figure; it accomplished the reduction by further scaling back the tanker capabilities. The company was motivated in part, according to its e-mails, by the looming retirement of Undersecretary of Defense Edward C. Aldridge Jr., a supporter of the deal. His replacement, acting undersecretary Michael W. Wynne, had already aggressively pressed the firm for a huge price cut.
On May 23, Aldridge's last day at the Pentagon, he announced an agreement with Boeing on most terms of the lease, calling it a way to get new tankers "delivered much faster" than if they were purchased.
Critics of the deal have continued to complain about Air Force decisions to award Boeing a $5 billion sole-source maintenance contract for the new tankers and to permit the company to earn a 15 percent profit on the deal, or more than double what Boeing makes from commercial aircraft orders.
Several Air Force officers recently brought chunks of a corroded wing from a tanker in the trunk of a car to Capitol Hill, and an Air Force general was flown in from Oklahoma to brief members of Congress on tanker aging.
Asked a month ago about Boeing's travails, Bush spoke about trying to "help the worker, help the economy" by funding the construction of new planes. About the tanker leasing deal, he said, "I think it's going to go through."
McCain said he still hopes to stop it, arguing that using defense spending to create jobs undermines real military needs.
Staff researchers Margaret Smith and Karl Evanzz and special correspondent Gregory Vistica contributed to this report.
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