Air Force –

The Air Force presentation provides evidence that the modernization of systems essential to the new mission of the F-22A has yet to be completed. The main concern is a new radar system, which is considered by the Air Force to be integral to the F-22A’s ground-attack and intelligence gathering capabilities.⁸ The radar system is not even scheduled to be received by the Air Force until November 2006, and the software is not scheduled to be completed until 2010. The nature of this funding establishes the case that the F-22A is still receiving, and will continue to receive, essential upgrades that are still being developed and have yet to be tested.  This ultimately affects the F-22A’s ability to prove that the program complies with the “Stable Design” requirement. (Appendix B)

Requirement 5: That the estimates of both the cost of the contract and the anticipated cost avoidance through the use of a multiyear contract are realistic.

GAO –

“We believe this is questionable at this time and will require the Air Force to submit a detailed and independent estimate of the cost and will require some evidence that the contractor is willing to sign up to this cost.” [Emphasis added] (Appendix A)

CRS –

“The DoD has reported 10 cost over-runs in the F-22 program. (DoD is required to report cost overruns in the SAR when the cost estimate is 15% higher than past SAR.) ... Adjusting for inflation, the program unit acquisition cost (PUAC) estimate in 1991 was $114 million per aircraft ($05) and in 2006 the estimate was $354 million per aircraft ($05).  In real terms, this represents a per-aircraft increase of over 200%.”(Appendix G)

DCAA – 

A November 9, 2005, Defense Contract Audit Agency (DCAA) presentation⁹ concluded there is “Moderate to high risk ... [in] Cost Estimate Development” after discovering $141 million in unsupported, inaccurate, and defective data in Air Force F-22A cost estimates. (Appendix H)

House Government Reform Subcommittee on National Security Chairman Christopher Shays –

The Air Force has a history of not providing accurate cost estimates, and there is little reason to believe that it will be any more accurate for this round of procurement. For instance, five years ago, the House Government Reform Subcommittee on National Security was frustrated in getting accurate F-22A program cost estimates from the Air Force. The Subcommittee had tasked the GAO with reviewing the F-22A program’s cost reduction plans. What the GAO found was a $7 billion variance between the Air Force’s cost estimates and those made by the Office of the Secretary of Defense’s Cost Analysis Improvement Group. On August 20, 2001, Subcommittee Chairman Chris Shays wrote to House Armed Services Chairman Duncan Hunter that, “. . . as you proceed with your deliberations on the pace and scope of the F-22A program, please be advised we can have little confidence in the accuracy of production cost estimates and less confidence in the legitimacy of projected production cost savings based on those estimates.” (Appendix I)

Requirement 6: In the case of a purchase by the Department of Defense, that the use of such a contract will promote the national security of the United States.

At the end of the day, perhaps the most important question remains - why are we continuing to fund a Cold War-era weapon that was designed to counter the next-generation Soviet fighters that were never constructed? In fact, the GAO stated, “Based on our review, in our opinion, the DOD has not demonstrated the need or value for making further investments in the F-22A program.” (Appendix A) While the final requirement of the law – that it promotes the national security of the United States – is a matter of judgment and is not quantifiable, the ballooning costs of this aircraft render it impossible to meet the Air Force's own stated requirements for 381 F-22A’s “in order to meet the needs of the warfighter.” If it is too expensive to buy enough aircraft to meet our national security needs, this certainly challenges the assumption that the final requirement has been met.

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A Financial Conflict Of Interest?

In early 2006, the Pentagon’s Office of the Under Secretary of Defense, Acquisition, Technology and Logistics requested that a report be prepared by IDA. IDA is a federally funded research and development center (FFRDC) which has assisted the DOD since it was established in 1947 by Secretary of Defense James Forrestal.¹⁰ IDA states that it does not work for the private industry and that it takes “...great pride in the high caliber and timelessness of its analyses, which are produced in an atmosphere that encourages independent thinking and objective results.”¹¹ The report, “F-22 Multiyear Procurement Business Case Analysis,” found that the F-22A program met all the criteria needed for the program to be purchased under a lucrative multiyear procurement (MYP) strategy.

Admiral Dennis C. Blair, USN (Ret.), joined IDA in October 2002 and was promoted to President just one year later. Also in October 2002, Admiral Blair joined, and still sits on, the Board of Directors for defense contractor EDO Corporation, a subcontractor on the F-22A.¹² According to EDO’s website, EDO manufactures essential suspension and release equipment for the F-22A. The LAU-14/2 AMRAAM Vertical Eject Launcher is the component of the F-22A that carries and ejects the AIM-120C missiles.¹³ He currently controls 1,787 shares of stock and 30,000 stock options in EDO, worth well over half a million dollars if he chose to exercise those options. (Appendix E)

As a subcontractor on the F-22A, EDO has a significant financial stake in a multiyear procurement for the F-22A program. According to an analysis by POGO, Lockheed Martin has awarded EDO with approximately $90 million in contracts for components for the F-22A, $68.4 million of which have been awarded since Admiral Blair joined EDO.

An MYP can significantly impact the value of the company’s stock over time as investors perceive that such a contract will provide stability of revenues.  According to one report: “multi-year contracts substantially increase stock valuations due to investor perception of controlled risk.”¹⁴ A National Defense University study on the Aircraft industry noted: “If the F-22 proceeds with production as expected, a multi-year contract would provide a needed financial boost to Lockheed-Martin.”¹⁵

Admiral Blair became director of EDO the same month that he began working at IDA.  He serves as  Chairman of the Compensation Committee and is a member of the pension investment committee.  As a member of the Board of Directors he is an essential figure in the structuring, direction, and overall success of EDO.

IDA is a registered FFRDC and is considered a contractor of the Federal government. As a contractor, IDA does not fall under the same conflict of interest rules as federal employees. POGO contacted IDA to determine their conflict of interest policies, and received an email stating, “Due to the nature of our work at the Institute for Defense Analyses, we are unable to provide information about conflict of interest policies or forms.  If you are seeking general information about IDA, please visit our website at www.ida.org.” (Appendix E) After further research, POGO discovered that FFRDCs such as IDA have enjoyed the credibility of being regarded as an arm of the government, yet they are not subject to any such legal restrictions.

It is important to emphasize that POGO is in no way suggesting that Admiral Blair has violated any laws or regulations. There is a disconnect between the perception that FFRDCs have to comply with conflict of interest laws and the reality. This problem is worth Congress’ further attention.

While this is perfectly legal, it raises many ethical concerns.  IDA’s report has been cited by Lockheed Martin, multiple Senators, and the Air Force as the primary evidence that the MYP of the F-22A will save the American taxpayer millions of dollars. On the floor of the Senate, many Senators claimed that the information provided by IDA was more accurate than that provided by the GAO.¹⁶  IDA’s report, in fact, was the pivotal document upon which MYP status for the F-22A was granted by the Senate.

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Cancellation Costs – How To Buy A Lemon

The decision last year by Congress to fully fund the C-130J multiyear procurement offers a relevant lesson for the current debate on the F-22A – that is a lesson on how the Air Force is forcing the American taxpayer to buy its lemons. Having succeeded in misleading Congress on the C-130J deal, the Air Force and Lockheed Martin are putting the same playbook into action on the F-22A. One of those plays is to lock the American taxpayer into buying the Air Force’s pet projects, then create the impression that cancellation is impossible.

The C-130J is such a failure that the DOD sought its termination under Program Budget Decision 753, against the wishes of the Air Force. In 2005, although POGO released a copy of the C-130J contract showing a cancellation ceiling of $440 million, the Air Force misinformed the Secretary of Defense and Congress, stating that it would cost $1.78 billion to cancel the contract.¹⁷ In June 2006, The Pentagon IG (DOD IG) issued a report confirming that $440 million was the most it would cost to cancel the contract, noting: "By definition, a contract cancellation ceiling represents the Government's maximum liability.”¹⁸

As a result of the Air Force’s misleading claims about the C-130J, the American taxpayer is now locked into paying an additional $4 billion on an aircraft that cannot even be taken into combat. Indeed, as the New York Times reported last year, the C-130J’s primary use appears to be that it creates added justification to keep certain U.S. military bases open (because the C-130J must be deployed domestically), helping Members of Congress who are fighting base closures.¹⁹ As the DOD IG noted in a June 2006 report, “... ten years after the first award in 1995, the contractor was still delivering non-compliant aircraft.”²⁰

As with the F-22A, the DOD IG report on the C-130J found that the Air Force failed to request cancellation funds – as is required under multiyear procurement rules – and then issued inaccurate cancellation estimates:

... the FY 2006 President's Budget did not include sufficient funds to terminate the Air Force C-130J aircraft procurement and accelerate the Marine Corps KC-130J aircraft procurement if the unsupported cost estimate was valid.²¹

Of course, requesting the cancellation costs from Congress would require an accurate, publicly available figure subject to review and debate. So far, the Air Force has not provided such a figure for its proposed F-22A multiyear procurement, which could lead to the same exaggerated cancellation estimates as the C-130J if the F-22A program faces trouble.

Indeed, as recently as February 2006, a Power Point presentation from the Air Force showed that its plan was to get a special waiver from the Office of the Secretary of Defense that would allow the Air Force to fund cancellation costs outside the contract: “Termination liability and contract cancellation covered by Air Force outside F-22 budget authority. ... Need OSD(C) waiver to allow termination liability/cancellation ceiling to be an unfunded contingent liability.” (Appendix B, page 18)

In March 2006 Congressional testimony, the CBO described how cancellation of a multiyear procurement would put the government and the taxpayer at greater risk if funds were not set aside:

But with no funds set aside specifically for cancellation costs, the Air Force would have to terminate orders for some or all of the aircraft that had already entered production if a decision was made to cancel subsequent orders. Thus, if it canceled the remaining years of the multiyear contract at the end of the first year, the government would not only forgo the aircraft to be produced in later years but also would not receive all of the planes it had ordered in the first year – and the taxpayers’ investment in those aircraft would be lost. In particular, at the end of the first year, the Air Force would have ordered 20 aircraft. If the government decided to cancel the contract at that point but had not set aside funds specifically for cancellation costs, it would not only forgo the 40 aircraft that had not entered production, but, to free up funds for cancellation costs, it would have to stop work on some of the 20 aircraft that had already been ordered. The Air Force’s proposal differs from the practice of full up-front funding in two ways: it seeks incremental funding for acquiring capital assets, and it provides for a multiyear procurement without funding for possible cancellation costs.²²

The CBO further stated, “On the basis of cancellation liabilities for other multiyear programs, that amount could be between 5 percent and 15 percent of contract costs. ... According to the Air Force, the 60 airplanes would cost about $10.5 billion in total.” As a result, cancellation costs could reach as much as $1.6 billion if it follows the pattern set by other multiyear procurements.²³

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Conclusion

In conclusion, it is clear that independent congressional analysts have significant concerns with accepting the F-22A program as a candidate for multiyear procurement.  Based on its own research, POGO does not believe the F-22A program meets multiyear procurement requirements, and recommends that Congress strike language authorizing the MYP until such time that the program meets those requirements.

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Recommendations

1. POGO recommends that the language authorizing multiyear procurement of the F-22A be struck immediately, to be reconsidered only when the program can more thoroughly justify its capabilities to fulfill the requirements of an MYP contractual agreement.

2. Define “substantial savings” in Requirement 1 of Title 10 U.S.C. Section 2306(b). POGO further recommends that substantial savings be defined as 10%, as has been done in the past. Establishing 10% as a permanent definition for substantial savings will provide a reasonable measure of accountability rather than leaving the standard open to interpretation.

3. Require an independent analysis of cancellation costs for the F-22A and all proposed multiyear procurements, and that those analyses be provided to Congress before it approves an MYP. Furthermore, the Pentagon should be required to request funding to cover those cancellation costs in the event the program is terminated.

4. Apply federal conflict of interest laws to federally funded research and development centers.  These organizations are fully funded by the federal government and should be required to meet the same ethics standards as federal agencies.