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Lies, Damned Lies, and The Pentagon’s Latest Budget Numbers

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The Bookkeeper, by Philip van Dijk, c. 1725

There’s a pair of must-reads just out for anyone paying attention to the Pentagon’s acquisition nightmare: one is a routinely scheduled, but important, report from the Defense Department; the other comes from one of the very few entities doing even minimal oversight of the Department of Defense these days, the Government Accountability Office.

Reviewing the reports separately results in a muddled picture of how the Pentagon buys its weapons. Happily, each report fills some of the data missing in the other. But, the two reports still leave some gaping holes, while providing a false impression of progress in the way the Defense Department buys weapons.

The two reports are GAO’s annual review of major hardware acquisition, Defense Acquisitions: Assessments of Selected Weapon Programs, and DoD’s new Selected Acquisition Report (SAR), both released March 30. What follows is my own After-Action Report — including the gaps, contradictions, and false assurances – after studying the data they do — and don’t — contain.

The Death Spiral is Alive and Well

GAO’s “snapshot” of DOD’s “2011 portfolio” withholds what I regarded as the most important data until you get to Appendix II on page 171:  DOD’s 96 Major Defense Acquisition Programs have grown in both R&D and Procurement by $74 billion in the past year, $233 billion in the last five years, and $447 billion since each of the 96 programs started.

Simple math shows that cost growth could be accelerating:  the $74 billion in cost growth in the last year is more than the average cost growth over the past five years ($47 billion).

Note also that the Pentagon’s acquisition menu has grown in cost more in a single year than the $55 billion DOD would be required to surrender under the sequestration mechanism scheduled to occur in January 2013.

That puts quite a different spin on the “doomsday” horror that Secretary of Defense Leon Panetta and his Republican cohort in Congress say would occur if sequestration happens.  While we are talking about two different time frames, it does mean that simply controlling cost growth, let alone imposing real efficiencies, would have virtually eliminated the need for sequestration.  Instead, Panetta argues that such managerial competence would be “catastrophic.”

GAO presents its own tables and observations on the nature of this cost growth; they are mostly useful and instructive.  I found one observation to be especially revealing:  61 of the 96 programs are increasing in unit cost, not just total cost. (See pages 6 and 15.)

GAO reports that the usual explanation for higher unit costs—smaller production numbers—applies to only 11 of those 61 programs.  In other words, in 50 programs costs went up “due to actual research and development or procurement cost growth—not changes in quantities.”

Put another way, in the vast majority of programs showing unit cost growth, DOD has not yet reacted to the problem by reducing the numbers to be bought.  Doing that would, of course, further increase the unit cost (and reduce any savings), but clearly, there is a long list of programs that have been sustained, despite unit cost growth, by DOD’s ever growing budget.

With that budget no longer growing—even sustaining some short term cuts—those 50 programs are prime candidates for reductions—bringing higher unit costs, smaller buys, shrinking (and aging) inventories and—of course—additional program budget reductions.  The “death spiral” (ever more expensive weapons being bought in ever smaller numbers ) is alive and well and will likely accelerate in future years.

Unfortunately, GAO did not probe this matter in its report; it did not even explicitly identify the 50 programs, except to print 116 pages of individual program summaries from which indefatigable readers could extract their identities.

Finally, it is useful to note that apologists for the DOD system, such as contractors, their consultants and their helpers in Congress, like to blame budget decisions for cost growth: tighter budgets mean production cuts which mean higher unit costs, they claim; however, as GAO finds, more money (not less) means unit cost growth in the vast majority of cases.

Somewhat Over Taken by Events

The GAO report asserts it is a review of DOD’s “2011 portfolio.”  More specifically, it is a review of the DOD data available to GAO from August to September, 2011, which would be the Selected Acquisition Reports that were available during the research phase of the GAO report.

The very same day the GAO report came out, DOD released its new SAR data; in some cases, GAO correctly anticipated what was in the new SAR, in some cases it did not.

GAO was close in expecting a decline in the number of Major Defense Acquisition Programs (MDAPs) from 96 to 84 programs to be tracked in the new SAR (the actual number was 85), but in other cases GAO’s numbers showed a trend that the new DOD SAR contradicted.

For example,  GAO’s two-page summary on the Navy’s new carrier, CVN 78, showed a decline in costs (the data is from August 2011), while the new SAR showed that the program “increased $2,233.2 million (+5.5%) from $40,295.3 million to $42,528.5 million” in cost growth subsequent to August.

It is unfortunate that a valuable and important resource like GAO permitted itself to report on DOD data that were at least six months old on virtually the same day DOD put out the new data.

Don’t blame the actual auditors and evaluators at GAO for this.  GAO is a top-heavy and ponderous bureaucracy, incapable of turning around new research quickly.  I know; I worked there for nine years.

GAO will likely rebut that it takes time to get it all right; that’s correct, but I can’t imagine how it would take more than a week to conform the numbers in GAO’s report to the more recent March 2012 data from DOD—rather than copy editing and ruminating through even higher bureaucratic levels to approve—over and over again—what the actual auditors and evaluators found, and independently confirmed, to be the actual numbers.

As we said in the GAO cafeteria: “GAO doesn’t put out reports — they escape.”

Late But Still Useful

Even if its data are a few months stale, it’s a good thing the GAO analysis is available; it helps to counter some of the baloney from DOD.

For example, one would get the impression from the DOD SAR release that the number of MDAPs is declining.  There were 96 in mid-2011; 14 were dropped from the system because they have completed their acquisition (like the F-22 fighter) or were canceled (like the C-27 transport).

Only two were added in 2011 (two new air refueling tankers, the KC-46A for the Air Force and a KC-130J for the Navy), and other programs (all of them obscure) were added more recently.

Thus, according to DOD, the Pentagon’s overstuffed acquisition menu is going down from 96 major programs to 85.  This would seem to indicate that all those cancellations mandated by former Secretary of Defense Robert Gates, who was credited with canceling “over 30 major defense programs,” are finally beginning to actually occur, and progress is being made in getting DOD’s out of control acquisition ambitions under control.

But we learn from the GAO report that while 14 SAR programs are indeed being taken out of the system, as many as 16 new programs are being added.  (See pages 4, 18, 29 and 30.)

It appears likely that the total number of MDAPs is not declining but ultimately increasing.  Needless to say, we are left clueless about this future development from DOD—just as we are about how DOD plans to pay for them (and the rest) with declining budgets.  (Actually, if you have observed DOD for any time you already know: they’ll accelerate the death spiral.)

Sadly, once again, GAO does not probe this inevitable problem.  Instead, it goes to some length to argue that DOD acquisition is headed in the right direction.  Ignoring the trends that clearly—at least to me—show that costs are not under control but still growing, GAO finds in its report that DOD is making progress in implementing reforms and shows a matrix heavily marked to indicate such progress.

The indications of progress, however, are immensely unconvincing. In arguing that DOD seems to be complying with Congress’ acquisition reform legislation, for example, GAOs cites the frequency that DOD is planning to develop prototypes of systems before development starts.

Rather pathetically, however, GAO fails to point out that in many instances DOD is exploiting the gigantic loophole Congress created by permitting DOD to merely develop sub-system prototypes.  (See page 30:  DOD can quite literally avoid developing a new aircraft prototype by developing instead any subsystem prototype, perhaps just the engine’s afterburner.  And, as the second paragraph on page 30 vaguely states, DOD can also exploit some gigantic loopholes to avoid competing prototypes [whether subsystem or not], or even competing development or production contracts without any prototypes.)  This is not progress; it’s business as usual.

Useful Trivia

Plowing through GAO’s 116 pages of individual program summaries can be a bit tedious, but it can also be rewarding.  The item labeled “F-22 Modernization Increment 3.2B” may not be an attention grabber, but buried in the text is the notation “The total cost for all of F-22’s modernization increments and improvement is $12.7 billion.”

The F-22 is being removed from the list of Major Defense Acquisition Programs that are the subject of DOD’s Selected Acquisition Reports because the program is finished its procurement buy—the logic being that the big money has already been spent.

And yet, another $12.7 billion is to be paid out for “modernization increments and improvements,” making F-22 upgrades one of the more expensive programs listed in the new SAR.  Clearly, tracking the F-22 via SAR reports needs to continue.

The added $12.7 billion will also have a substantial impact on the F-22’s already astronomic unit cost. GAO identified the previous SAR cost of the F-22 program at $79 billion, but with this additional $12.7, it would presumably go up to $91.7 billion.

For the 188 F-22s built, that makes each one cost $487.8 million (in 2012 dollars).  Just a little pricey for an airplane that has not seen combat in three wars and various expeditions since it went “operational” in 2005 and was grounded for about four months in 2011 for suffocating its own pilots (and perhaps killing one): a problem, by the way, the Air Force has neither explained nor fixed—as it tells its pilots to suck it up and resume flying.

Another tedious, but rewarding, exercise is to run through the latest SAR list armed with a calculator.  The list shows the then-year dollar cost (or rather the current estimate of it) and the hoped-for quantity.  Pick your favorite program and calculate the unit cost. Mine include:

CVN 78 (Gerald Ford-class) aircraft carriers: $14.2 billion each.  This is $800 million more per unit than the last SAR estimated; with the first carrier of three incomplete, expect more unit cost increases.

DDG 1000 (Zumwalt-class) destroyers: $7.0 billion each; also up from last year.  These “destroyers” are 14,000 tons—more than a World War II heavy cruiser or the Nazi’s “Pocket” battleships.  Weight is cost, even as they downgrade the capabilities of the air defense radars on these behemoths.

F/A-18E/F: $90.3 million each.

KC-130J tanker for the Marines: $101.2 million each. Since when should a 50-year-old airframe design for a prop-driven tanker be 10% more than for the latest upgrade of a fighter-bomber?

– The simpler cargo version of the C-130J is no bargain either: $93.6 million each.  According to the Air Force’s factsheet on C-130s, the J model is 61% more expensive than the H model and 307% more expensive than the E model.  Don’t expect commensurate increases in key performance measures, such as range and payload.  Unit cost increases virtually never equate to performance increases; the J model of the C-130 is a good example.

Littoral Combat Ship: $680.7 million each; you’ll recall the buy-in price was about $250 million a few years ago.  Expect the price to go up even more as they sort out the dysfunctional weapons packages, and more.

V-22 Osprey: $117.3 million each:  Pricey for a high-speed helicopter transport.

– The new KC-46A tanker from Boeing is $290.4 million each—way up from the original Boeing estimate back in 2001 for the then-very-pricey lease-purchase of 767-type tankers that costed out at $200 million each.  Inflation does not explain the difference; cost growth does.  Also, the word seems to be out that this unit cost will go up more.

F-35: $135.1 million each. Want an engine with that?  Add $26 million.  That makes $161.1 million each, but that is before the next round of F-35 unit cost increases; expect them in early 2013.

Fourteen billion dollars for an aircraft carrier; $7 billion for an oversized destroyer; $161 billion for the “low cost” fighter bomber.  These prices are truly out of control.

And, they are still growing.

Ben Freeman at the Project on Government Oversight showed me some calculations he has done based on the latest SAR.  Of the 85 programs DOD listed, 46 are showing unit cost increases.  The average across all 85 programs is +12.4%, or $21.9 million, for each unit.

The GAO and DOD reports on cost growth contain important information, but they also miss some important insights, and they both paint a false picture of improvement in DOD acquisition.  There will be improvement when the numbers show improvement; not when important data is left out or when glib management types try to put lipstick on the pig.

Winslow T. Wheeler is the Director of the Straus Military Reform Project of the Center for Defense Information in Washington.  He is also the editor of the anthology “The Pentagon Labyrinth: 10 Short Essays to Help You Through It”.

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