Jul 15 2011
But despite these activists’ best efforts—and further reform attempts on Capitol Hill and within the Pentagon—the Defense Department’s financial house is still a mess. After the September 11, 2001, terrorist attacks, the department enjoyed a seemingly endless cash flow, so managers had little incentive to bore down on just what they were buying, how much they were paying, and whether they really needed this good or that service. The wars in Iraq and Afghanistan—and, particularly, the urgent equipment needs in the field—often forced economy to take a backseat to expediency.
The result is that a quarter-century after those first embarrassments, many of the problems persist. It turns out that the Army recently paid $644.75 apiece for tiny “spur gears” worth $12.51 and shelled out $1,678.61 for small roller wheels that should have cost just $7.71 each, according to a report this spring from the Pentagon’s inspector general that bears a shocking resemblance to the findings of the 1980s. Boeing ultimately refunded the government nearly $2 million for those and several other overpriced helicopter parts it sold to the Army. But the report begs the question: How much money does the department waste?
In the end, the Pentagon may not even know. Each military service and defense agency has dozens, if not hundreds, of archaic accounting systems that cannot talk to each other, making it impossible for officials to balance the checkbook of the department that consumes more than half of the nation’s discretionary spending—nearing $700 billion annually. Watchdogs say that accountants often cannot track a check once it is cut, and investigators have uncovered instances where officials failed to review invoices, making it easy for contractors to overcharge.
Now, the days of free-flowing cash are winding down as the White House and Capitol Hill prepare to scale back the Pentagon’s budget. But the problems are so pervasive that top Defense officials publicly acknowledge that correcting them will take years. That means billions more dollars squandered even as the military weighs how to reduce the size of the fighting force and pare down missions to free up dollars. “There’s a culture in the Defense Department that has to be just shaken up,” Sen. Chuck Grassley, R-Iowa, who has been tracking these issues since the days of the overpriced toilet seats, said in an interview. “There’s a culture of nonconcern about waste and fraud.”
Pentagon Comptroller Robert Hale, who has the unenviable task of cleaning up the department’s finances, doesn’t think things are quite as grim as Grassley says they are, but he acknowledges that accomplishing the military’s core goals often trumps dotting the i’s and crossing the t’s. “There are only 24 hours in a day, and you have to sleep and eat,” Hale said. “If you’re trying to handle a shooting war in Afghanistan and a military commitment in Iraq and start a Libya operation and handle humanitarian operations in Japan … that’s a tall order for people who have to make this work.”
WATCHING THE PENTAGON
It seems fitting that Dan Blair’s office on Army Navy Drive in Arlington, Va., has an unobstructed view of the Pentagon. As the deputy inspector general for auditing, Blair is charged with overseeing the 100-plus audits that the IG’s office churns out every year. Most of them, like the report on the overpriced Boeing parts, do not portray the Defense Department in a particularly flattering light.
Blair, a 16-year veteran of the Government Accountability Office, is just one of thousands of auditors and investigators who believe that the Pentagon needs a better balance between accountability and expediency—even during war¬time. “We don’t want to say you need to be fiscally responsible at the cost of meeting your mission,” Blair says. “But the converse is also true—you can’t be so focused on the mission that you’re not fiscally responsible, either.” While paying too much for an urgent need may be understandable, auditors get concerned when the military continues to cut exorbitant checks for spare parts, questionable body armor, and other gear long after the procurement becomes routine.
To these watchdogs, saving money saves lives, particularly as the Defense Department looks to trim its annual budgets. With fewer dollars at its disposal, the military simply can’t afford to waste its resources. “We save billions of dollars, and we make it easier for the department to get the best equipment and the best training for the troops,” Blair says. But if Defense officials are tightening their belts, how does waste—particularly, obvious embarrassments like the toilet seats—keep happening?
In the case of the Army’s overpriced spare parts, it largely comes down to bad communication in a fragmented bureaucracy. Workers at the Army depot in Corpus Christi, Texas (the ones who handle the parts), have no idea how much the Army pays for them. Procurement officers (the ones who do the buying) are hundreds of miles away in Huntsville, Ala.; they acquired thousands of components from Boeing with little knowledge of what, exactly, they had purchased. “Everybody is kind of waiting for the other person to catch these problems, and a lot of times they don’t catch them,” said Henry Kleinknecht, the Pentagon IG’s director of pricing and logistics acquisition.
As a result of the IG’s investigation, Boeing has repaid the Army $1.7 million for six “defectively priced” parts identified in the report—only a fraction of the $13 million investigators had concluded that Boeing owed for overcharging. The aerospace giant says it cooperated with the investigation and changed its processes to avoid repeating the mistakes. Army officials decided not to seek the $11.3 million difference, however, fueling concerns among watchdogs about how committed the Defense Department truly is to reclaiming lost and wasted money.
The report made its way to the comptroller’s office. Hale said he is concerned and that he has forwarded the information to the Defense Contract Audit Agency—which reports to Hale, not the independent inspector general—for another audit. Boeing may be forced to pay back more money, he said, but for him, the case points to a larger problem. “To say that the government pricing rules are arcane would probably be an understatement,” he said. Kleinknecht said that the IG has bandied about ideas as simple as printing the price on the packages that go to the users. The roller wheel—which looks like it could belong on a child’s toy—would certainly trigger anyone’s alarm if it came with a $1,678 price tag. But as with any sprawling bureaucracy, actual solutions are much more complicated. The IG recommends developing new procedures to govern how the Defense agencies handle pricing and inventory of spare parts.
Those adjustments, however, require a dramatic cultural shift. Blair says it sometimes takes several audits to spark significant change within an office or agency. “It’s a mixed bag,” he said. “It’s a department that has a very entrenched culture and doesn’t change very easily.” Witness Defense Secretary Donald Rumsfeld’s ultimately fruitless attempts at institutional reform. And even when agencies update their business practices, it’s often hard to keep up the momentum amid regular staff turnover. “Even though you may have fixed a problem, then someone new comes in and says, ‘Well, I don’t think I like to do it this way. I want to do something different,’ ” Kleinknecht laments. The constant personnel changes have another side effect: Intransigent managers can often stall until their bosses move on to another job.
The report also highlights an even deeper problem: The Army didn’t actually need many of those spare parts from Boeing. It could have saved millions of dollars by tapping into the Defense Logistics Agency’s existing inventory. DLA buys and manages spare parts in large quantities to keep military equipment humming. “Not only did we overpay, we already had extra [parts] in the warehouse,” said Sen. Thomas Carper, D-Del., one of a handful of senators who has been watching the Pentagon’s financial problems closely. “And, despite that, we went and bought even more.” The military simply can’t manage its massive inventory, according to Carper, who chairs a subcommittee on federal financial management.
You don’t have to look hard to find other examples. Indeed, Hale has acknowledged that the department ordered $1.2 billion worth of potentially redundant components. Many budget-watchers interviewed for this story argued that the problem is far worse, especially considering how many billions of dollars in excess parts are already collecting dust in the Pentagon’s warehouses. On average, the Defense Logistics Agency manages $13.7 billion in spare parts in its inventory at any given time, but in 2010, GAO found that the military required only 63 percent of those parts to meet its needs for the next two years—meaning that it had overspent by more than $5 billion.
The Pentagon is setting performance targets to get the problem under control. But with its antiquated inventory systems, it’s still a world away from operating like Wal-Mart and Target, which update their inventory on a real-time basis. Within the Defense Department, officials often review the contracts for spare parts only quarterly, allowing the buildup of billions of dollars in excess parts. Carper suggests that officials ask the private sector for help. “If [businesses] can figure out their inventories and avoid these kinds of problems, with operations not just in America but well outside of our borders,” he said, “this can be done.”
To emulate private companies, the Pentagon has been trying for years to update its business systems. Ironically, however, the very systems developed to clean up the department’s fiscal mess are themselves a staggering $6.9 billion over budget and years behind schedule, according to an October GAO report. Military branches and Pentagon offices are driving up the cost of these modern-day electronic ledger sheets—dubbed “enterprise resource planning systems” or ERPs—by customizing them to suit their decades-old business practices, rather than changing the way they do business. “Folks out there who are good—and they want to get the job done—are used to using a system for 20 years,” Hale says. “And we, all of a sudden, come in, and every screen is different and the rules are different.”
The bottom line, he said, is that the department is making progress. But Defense is developing nine ERPs to replace more than 500 older business systems that cost hundreds of millions of dollars to operate annually. And all nine ERPs won’t be in use for years. “If you don’t look at the business processes first, technology is just going to add to your problems,” said Charlie DeFelice, a 35-year veteran of the financial-services industry who is now a management consultant to other government agencies. DeFelice likens the Defense Department’s budget to anyone’s checkbook—except with more zeros in it. “Accounting is accounting is accounting,” he said.
MILLIONS OF TRANSACTIONS
The Defense Department’s sprawling bureaucracy performs roughly 150 million accounting transactions a year at bases and offices around the globe. The purchases range from toilet paper to warplanes, and the sheer amount of money spent annually dwarfs most other government agencies. “I envy some of the non-Defense agencies that are one-twentieth of our size, and have three or four locations—or even a dozen,” Hale said. “We have thousands.”
DOD’s financial-management workforce alone employs 58,000 people, many of whom have been trained in fiscal law. The department also employs thousands of auditors within the IG’s office and elsewhere to serve as backstops against wasteful spending. Outside the Pentagon, teams of investigators at GAO and at independent watchdog groups scrutinize its procurement practices.
But even with all those eyes on the problem—partly because of all those eyes on the problem—good-government types wonder what falls through the cracks. The department’s hundreds of specialized accounting systems make it impossible to track transactions across the enterprise, and they create a balkanized culture in the military’s many disparate outposts. Workers, in short, are concerned strictly with their own piece of the bureaucracy.
It is no secret that the Pentagon is one of only two federal agencies that has not been able to audit its books, despite a 1994 law requiring it. The other is the Homeland Security Department, which was created less than a decade ago and appears to be on a faster path to an audit than the Pentagon. Congress has established deadlines for Defense officials to complete an audit, but lawmakers have moved them back each time the department failed to meet them. The initial goal was 1997; the current target is 2017.
Hale, who was Air Force comptroller when Congress first required the audits 17 years ago, said he is “cautiously optimistic” that the Pentagon will meet the 2017 deadline. “We’re going to try,” he said. “It’s been a long time.” To motivate Defense officials and appease lawmakers, he has devised a series of internal near-term benchmarks that he hopes will get the department to an audit in six years. “Nobody wakes up in the morning and thinks, ‘I really need to get to work and work hard for a goal in 2017,’ ” Hale said. “I want goals that are this year so people do wake up and do something.”
He recently sent Congress an update on the Defense Department’s financial management. The bright spot seems to be the Marine Corps, which is expected to be the first military service to have one of its financial statements—the Statement of Budgetary Resources—successfully audited. Six other DOD entities, including the Army Corps of Engineers and the Defense Contract Audit Agency, have achieved clean audits. But those offices make up only about 20 percent of the department’s budget. The Army, Air Force, and Navy are making small gains—meeting near-term financial management goals—but are still years away from completing a successful audit. The Air Force is the furthest behind, in part because it will be the last to get its ERP up and running.
Most observers, including Carper, are skeptical that the Pentagon will meet the 2017 goal. Even defense hawks, like Sen. John Cornyn, R-Texas, are growing impatient, particularly as worries mount about the budget cuts that officials are considering. “I think most Americans would find it shocking that the Department of Defense is unable to produce timely, accurate, and complete information to support management decisions,” Cornyn said during Leon Panetta’s June 9 confirmation hearing to be Defense secretary.
Panetta, a former White House budget chief, has said he will make the Pentagon’s finances a top management priority. That could appease watchdogs who fret that Pentagon leaders have not taken the issue seriously. “The word has to come from the top,” Carper said. But Winslow Wheeler, who was part of the reform movement in the 1980s while serving as a Senate aide, points out that Panetta could find it difficult to discipline a reluctant Pentagon, particularly as he tries to settle into his job. “That’s going to be a very tough test for him to pass,” said Wheeler, who is now an analyst at the Center for Defense Information.
It’s an issue that Defense secretaries have struggled with since at least the 1980s, when Caspar Weinberger was widely ridiculed for the overpriced toilet seats and hammers. Robert Gates, who ended his nearly five-year tenure on June 30, has been widely applauded for his efforts to trim fat from the Pentagon budget. He cut or scaled back more than 30 weapons programs and forced the military services and other agencies to find savings in their budgets. But even for Gates, Pentagon auditing was not high on his To Do list.
In a February 23 letter to Gates, Rep. Mike Conaway, R-Texas, an accountant by trade, urged him to make financial management a top priority. Without a clean audit of its most basic functions, Conaway warned, the Defense Department simply cannot assure Americans that it is spending their dollars wisely. And Conaway has wasted no time in making his case to Panetta. On the secretary’s first day on the job, Conaway and six other House members sent him a letter nearly identical to the earlier missive to Gates. “Our men and women in uniform and the American taxpayers deserve a Department of Defense that exercises fiscal responsibility,” they wrote.
“You know what’s great about an unlimited arms race? Unlimited arms spending,” legendary Washington Post political cartoonist Herblock wrote atop a 1986 cartoon. In it, he portrayed then-Defense Secretary Weinberger wearing a $640 toilet seat around his neck and approving tall stacks of paper labeled “whatever it is” and “whatever it costs.” In another cartoon, Weinberger and contractors angrily point at a whistle-blower and charge, “You don’t fit in here.”
For the reformers of the 1980s—many of whom are still tracking wasteful defense spending—those satirical images still ring true 25 years later. “GAO keeps writing reports that say, ‘Progress has been made but problems persist,’ ” Wheeler said. “They’ve been writing reports with that kind of theme in them ever since I’ve been observing the audit mess.”
He and others who have focused on this problem for decades are running out of patience. In a report card issued in June, Grassley gave the Pentagon IG—the office put in place to root out waste and abuse—a grade of D-minus, based largely on its speed. The inspectors, Grassley says, are not working quickly enough. Many audits take as long as two years to complete, meaning that the reports are stale by the time they come out. Money is harder to recover—and holding people accountable is more difficult—after years have passed and contractors and government officials have moved on.
IG officials respond that they saved taxpayers $4.2 billion through audits last year and could potentially save another $228 million. In a letter to Grassley last month, Pentagon Inspector General Gordon Heddell acknowledged that the IG could improve the timeliness of its reports but took issue with Grassley’s low grade. Blair, his deputy, insisted to NJ: “Our work is far better than D-minus, and I stand behind the work that we do.” He says that his office is constantly trying to narrow the scope of investigations and deliver audits faster. But he emphasizes that quality audits take time.
Disputes over oversight extend to Congress, where members have wildly different approaches on Defense Department spending. Sen. Tom Coburn, R-Okla., has pushed to freeze the Pentagon’s spending levels until it completes an audit. But that proposal isn’t likely to find much support among lawmakers who would rather live with a little waste than be seen cutting off the spigot for a military at war. Carper and others prefer to keep the heat on Defense officials by holding hearings, requesting reports, and writing policies intended to address the problem—a strategy that has achieved mixed results, at best. For his part, Grassley says that Congress has to show more independence when it comes to the military. “Don’t care who you rub the wrong way; just do your work,” he says defiantly.
Like many problems in government, there is no single answer to the Pentagon’s financial-management woes. Everyone from the Defense Department’s comptroller to the most impatient watchdog agrees that the Pentagon shouldn’t shell out big bucks for the smallest of spare parts. The problem for officials inside the building is finding a solution that works and then selling it to a sprawling and reluctant bureaucracy. Until they do, they’re going to keep repeating the same mistakes.
FULL ARTICLE (subscription): http://www.nationaljournal.com/member/magazine/the-pentagon-s-financial-house-is-still-a-mess-20110714?print=true